CRA: 3 Ways to Avoid a CCB Clawback

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Written by Amy Legate-Wolfe at The Motley Fool Canada

The Canada Revenue Agency (CRA) and federal government announced to Canadian parents this year two contradicting statements. On the one hand, there was a 6.3% increase in the Child Care Benefit (CCB); hooray! But this came after it was announced the CRA would also start clawbacks of CCB payments.

This meant that Canadian parents may have been quite shocked when they either received a reduced payment or no payment at all. It left many scrambling to make up the cash and wondering how they can avoid this in the future. Let’s get into it.

Bring down your income

The main reason that the CRA started clawbacks is that Canadians were overpaid by the CRA. This came down to how the CRA calculated CCB payments based on a family’s adjusted family net income (AFNI). So, the easiest way to make sure you’re not getting dinged by the CRA is to reduce your income as much as you can.

Now, before you quit your job to work at a fast food joint, there is a great way to reduce your income and still save for the future. This is by contributing to your Registered Retirement Savings Plan (RRSP). For every dollar you contribute to your RRSP, this is taken off your taxable income. This reduces your taxable income when it comes time for CRA to calculate your CCB. However, it also could bring you into a new tax bracket. In the end, you may get a tax refund instead of owing the CRA!

Max out your TFSA

Another way to push back at CRA clawbacks of CCB payments is to create tax-free income. This can be done by investing any savings you can manage into your Tax-Free Savings Account (TFSA). If you can, max it out every year to create the most amount of tax-free income possible.

Part of your TFSA can be invested long term through Guaranteed Investment Certificates (GIC). This way, you’re insulating your savings from market volatility and protecting it for the future. Right now, you can also get hold of great interest rates. So, you’ll be growing your income, but doing it tax free!

Choose dividend stocks

While part of your TFSA and RRSP should be invested in safe investments such as GICs, dividend stocks are another great option. You can create tax-free income in your TFSA through dividend stocks, with passive income that can be reinvested as well.

For example, you could invest in a stock such as Sienna Senior Living (TSX:SIA), which offers dividend income each month. It currently has a dividend yield of 7.93% as well, offering tax-free passive income in your TFSA at $0.94 per share!

Here is what that could look like if you maxed out your TFSA at $6,500.













Bottom line

The CCB is a great payment, made even better by the recent increase helping fight inflation and interest rates. But clawbacks could certainly come back again. Fight back by reducing your taxable income from your RRSP, and invest as much as you can in your TFSA. This will help protect your cash from the CRA, while also creating an insulted, tax-free income stream for the future.

The post CRA: 3 Ways to Avoid a CCB Clawback appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.