According to the CRA, you can deposit Canada Child Tax Benefit or Universal Child Care Benefit payments into a bank account or trust account in your child’s name and have the interest payments treated as your child’s income:

Generally, when you invest your money in your child’s name, you have to report the income from those investments. However, if you deposited Canada Child Tax Benefit or Universal Child Care Benefit payments into a bank account or trust in your child’s name, the interest earned on those payments is your child’s income.

If you already contribute the maximum allowed to the RESP and want to save more, it might make sense to deposit the CCTB and UCCB payments into a separate bank account and use the funds to invest in a diversified portfolio such as the Sleepy Mini portfolio. Another possibility is participating in a DRIP or SPP plan. As kids have little or no income, they are unlikely to pay any tax on investment income. Has anyone taken advantage of this tax break? I’d love to hear your comments.

Note: Thanks to Jordan for this tip.

[Update: I found this interesting thread on Red Flag Deals on the topic of investing the CCTB and UCCB payments in the child’s name]

This article has 15 comments

  1. Never knew about the rule before. Very interesting. I will certainly take your suggestion, at least to save the tax on my $2000 benefit!

    Thanks for the tip!

  2. Oops! After reading your article for a 2nd time, I realized that I would still have to pay the tax on UCCB, and only the interest/investment income is tax free.

    I am not sure if it’s worthwhile to put in the efforts. Two boys benefit, $2000 per year. If using 8% annual return (very optimistic), we are talking about the tax on the $160 investment income, or $80 saving per year at a 50% marginal tax bucket. Not worth doing. Time is precious.

  3. A commenter mentioned this rule on MDJ also, but wasn’t sure of the validity. Thanks for clarifying. Another issue is that if the child earns investment income, is it worth the extra tax return at the end of the year?

    Do you know the rules for opening a discount brokerage account for children? Does it have to be in the form of a trust?

  4. The savings are small, but I think it could add up over time

    UCCB pays $100/month per child for 6 years, so roughly for 2 kids if you can get an 8% return and a 30% tax rate that is $17,072, without any taxes it would be $18,360.

    With only a difference of $1,288 if you let that compound and manage to get 8% for 12 more years with no additional contributions you end up with $32,829 or $46,234 without taxes.

    For CCTB we get around $250/month for our kids, but it lasts 18 years, so with an 8% return that’s $91,965 with 30% tax, or without it’s $117,162

    The tax estimates are pretty rough, but after 18 years that’s over $38,000 more.

    For filing taxes, I got the GenuTax software which allows 20 tax returns every year with free annual updates. It’s super easy to use so I don’t think it would take much additional time or effort.

    The reason I’m thinking of doing this is my son has a speech problem that gives him a significant chance of future learning problems, which I think could lessen the chances he will go to college/university so it might make sense not to put all of his savings into RESPs.

  5. Canadian Capitalist

    Jennie W: In 6 years, they would have $12K though or $600 in interest income. $300 is worth the savings, don’t you think? I think this is a decent tax break for those parents who have contributed the maximum to the RESP and are looking to save more. Like you noted, the parents still have to pay tax on the UCCB.

    FT: I don’t think we can just open a discount brokerage account in the child’s name. Probably have to open an informal trust account. Shouldn’t be too difficult but I haven’t personally done this.

  6. I get 26/month for CCTB so i would not benefit hugely from this tax break, however I do benefit from all the postings on “Canadian Capitalist” because the discussions are very educational!

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  9. I was debating about doing this, and was hoping I could just open up a Tax-Free Savings account for my kids instead. Unfortunately they’re only available to those 18 and over . I wonder why the gov’t put in that rule…

    I am curious though, if I did open up an account specifically for this purpose, are there any accounts that you know of that would provide a decent return without a monthly/yearly fee? Too be honest I haven’t looked around yet, but it seemed that any savings would be eaten up by the fees.

  10. … or I should have said that the Tax-Free Savings Accounts are only GOING to be available to those 18 or over (in 2009)

  11. Canadian Capitalist

    ryanb: ING Direct is already trumpeting that they will introduce no-fee TFSA savings accounts. I’m pretty sure there will be plenty of competition and many banks and financial institutions will be offering “no-fee” accounts:

    http://www.ingdirect.ca/en/landingpage/tfsa/

  12. Thanks for the info CC, what I meant though was in regards to depositing the Canada Child Tax Benefit or Universal Child Care Benefit payments into a bank account or trust account in my child’s name (since the TFSAs will not be available to them as they are under 18 years). Were there any bank/trust accounts that you already know of that would provide a decent return without a monthly/yearly fee? I checked out ING for this and found one, but thought I’d double check for your thoughts. Thanks.

  13. The CRA website mentions CCTB but not UCCB. Are UCCB payments also eligible for this “tax credit”?

    (We have $100/mo/child UCCB, but negligible CCTB.)

    CRA: “You have to report any interest on money you invested in your child’s name unless you deposited Canada Child Tax Benefit payments into his or her bank account or trust. That interest is your child’s income.”

  14. The link has been changed for 2008, it is now here:

    http://www.cra-arc.gc.ca/E/pub/tg/5000-g/5000-g-02-08e.html#P630_71510

    As quoted in the top of the article the CRA says on this page:

    “Generally, when you invest your money in your child’s name, you have to report the income from those investments. However, if you deposited Canada Child Tax Benefit or Universal Child Care Benefit payments into a bank account or trust in your child’s name, the interest earned on those payments is your child’s income.”

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