In order to assist new parents, the Canada Revenue Agency (CRA) has implemented maternity and parental leave benefits to provide additional support during the care of their newborns. However, a recent survey uncovered that nearly one-third (29%) of Canadians experienced higher-than-anticipated tax deductions during their parental leave. As new parents, it is crucial to be aware of the following key considerations for tax of becoming a new parent.
Understanding Maternity and Parental Leave Benefits: Eligibility, Taxation, and Planning
Parents who are on parental leave can benefit from monthly payments that provide support during their time away from work. To qualify for Employment Insurance (EI) maternity and parental benefits, applicants must meet certain criteria:
Maternity Benefits Eligibility:
- Being pregnant or having recently given birth
- A parent caring for a newborn or newly adopted child
- A decrease in regular weekly earnings by more than 40% for at least one week
- Accumulating a minimum of 600 insured hours of work in the 52 weeks prior to the claim or since the start of the last claim, whichever is shorter
Self-employed new parents must be registered with the EI program for at least 12 months before applying and must have paid EI premiums for a specific duration.
Maternity benefits can commence as early as 12 weeks before the due date or from the child’s date of birth. These benefits cannot be received beyond 17 weeks after the due date or date of birth.
Parental Benefits Eligibility:
- Can be received within specific periods after the child’s birth or adoption
- Standard parental benefits (12 weeks) cover 55% of average insurable weekly earnings, up to a maximum of $573 in 2020
- Extended parental benefits (18 weeks) cover 33% of average insurable weekly earnings, up to a maximum of $344 in 2020
There is a delay of four to six weeks before the first payment is received. It is advisable to apply for EI parental benefits as soon as work ceases and before giving birth for maternity benefits. The employer will issue a Record of Employment, and the appropriate amount will be paid based on the type of leave taken.
Tax of Becoming a New Parent: To estimate benefits, individuals can use a calculator or follow this formula:
- Add insurable weekly earnings from the best weeks based on the Record of Employment.
- Divide that amount by the number of best weeks according to the location.
- Multiply the result by 55% for maternity and standard parental benefits, 33% for extended parental benefits, or 75% for the Quebec Parental Insurance Plan. This calculation provides an estimate for the leave benefits, and families with an income below $25,921 may be eligible for the family supplement.
It is important to note that all types of benefits received during leave, including employer top-ups, EI maternity and parental benefits, and Quebec Parental Insurance Plan benefits, are considered taxable earnings. The government does not take into account other income earned during the year when determining tax withholdings. This may result in additional taxes owed when filing the tax return. However, recipients of maternity and parental benefits are not subject to the repayment rules applicable to regular EI benefits.
To plan ahead and avoid unexpected tax liabilities, consider the following steps:
Step 1: Plan your finances by calculating your earnings, estimating childcare expenses, and identifying eligible tax deductions.
Step 2: Research the tax deductions made by your employer from your top-up during leave, and set aside the necessary funds to pay your taxes. Alternatively, you can ask your employer to increase tax deductions before starting your leave, and any excess amount deducted will be refunded when filing the tax return.
Step 3: With proper planning and awareness, you can enjoy parenthood without worrying about taxes.
By understanding eligibility requirements, taxation implications, and planning ahead, new parents can navigate maternity and parental leave benefits more effectively for tax of becoming a new parent.