A reality of the economic and demographic trends occurring in Canada is that everything costs more, especially in urban centres. Take real estate costs, for instance, which for new parents might be eight to ten multiples of their combined income to acquire a detached home. For new or expecting parents, this is increasingly a key question in family planning.
As a result, the cost of bringing a new child into a family is a very important consideration. Parents may wonder about the ability of their children to succeed with a middle-class upbringing or the fact that they could jeopardize their own finances if they are not careful. It’s imperative for families to discuss the financial aspects of raising children because, in reality, children are cost centres – and finances are typically cited as a leading driver of divorce in Canada.
To maintain your family’s long-term stability, it is recommended to review your family finances and the cost of raising children ahead of time. This will help new parents avoid a scenario where they are worrying about their mortgage payment while their child is screaming at 3 a.m.
Cost to raise a child in Canada
The author of a 2011 article in MoneySense magazine estimated that from birth to age 19 the average annual cost per child is $12,285 – or $243,660 cumulatively over that period. These costs did not include post-secondary tuition, which can add another $137,000 in inflation-adjusted dollars.
These costs also did not include the many opportunity costs that parents must sacrifice based on their parental responsibilities. Consider the parent who has to be home in time for their child’s bath time and misses out on time networking with management after work hours.
It’s a tall task for anyone – let alone new parents – to figure out how to create an extra $12,285 per year, per child, in after-tax spending power. With the added opportunity costs, they will likely have to find that extra money on a reduced combined income to boot.
Parental leave options
Ideally, when parents make the decision to have a baby, it’s also prudent to review how the family will be able to live off a reduced income while one of the parents is on maternity or paternity leave.
The prospect of losing one income will be partially replaced by government benefits through Employment Insurance (EI) and the Canada Child Benefit (CCB).
EI is 55% of your average insurable weekly earnings up to a maximum of $54,200 (2020). (Covid-19 Update: In regards to individuals who are scheduled to take maternity or paternity leave, essentially the EI process is unaffected when you apply for EI benefits. In the interim, if your EI benefits are not set to start for a few months and you are not working due to Covid-19, then you would follow the Federal government’s Canada Emergency Response Benefits (CERB), which provide $2,000 per month when eligible conditions are met.)
The CCB varies by adjusted family net income, however the maximum that a family can receive per child is $6,765 (2020) under age six. For most working families, this benefit would likely be reduced when adjusted family net income exceeds $31,120 and fully eliminated when income exceeds about $188,000 (for a one-child family where the child is under age six). (Covid-19 Update: The Federal Government recently increase the CCB for eligible families by a single lump sum of $300 per child, which will be payable in May 2020. Eligible families are families who already receive the CCB.)
Further Resources: For an estimated calculation of the government benefits your family may be eligible for please visit www.preetbanerjee.com/covid19-calculator a free online calculator setup by financial columnist for the Globe & Mail and regular CBC guest Preet Banerjee. Information on CERB or the Enhanced CCB please visit www.canada.ca/en/services/benefits/ei/cerb-application.html
After analyzing your expected combined income, it is a good idea to put this adjusted spending and lifestyle into practice ahead of time. This will allow you to adjust to the reduced spending level and build a savings cushion – and be ready when the baby arrives and your focus changes to caring for your child.
Care at home or at daycare?
Whether one of the two parents will remain at home with the child after maternity or paternity leave ends is another potential decision. Daycare services can be very expensive, so on an after-tax basis it might make financial sense for one of you to stay home, especially if you have multiple children in daycare at the same time.
For instance, in the Greater Toronto Area (GTA), even subsidized daycare services can cost $3,000 per month for two children. As a result, if one parent’s salary is equal to or less than $43,000 per year, then the economics of staying home to care for the children makes more sense (excluding tax deductions for daycare expenses).
On the other hand, this decision to stay home may be a bit short-sighted, because when that parent decides to return to work after the children are in grade school, they may suffer professionally. Research suggests that this “child penalty” impacts new mothers by reducing their future expected earnings for the balance of their working years compared to women without children. Despite this, the tradeoff may be the peace of mind in knowing that one parent is looking after the child, something money can’t buy.
A relatively recent option has been created for parents, which could bridge the difference between reducing daycare costs and ensuring that the parents are spending the early and critical development years with their child.
The 18-month maternity or paternity leave allows a parent to stay with their child for an extended maternity or paternity leave. They will not be entitled to additional EI benefits, however they would forgo paying for daycare those six months. As a result, this extended leave option may provide the best outcome for the child and the family’s finances.
Plan farther ahead for greater peace of mind
When new parents are swept up in the fun and chaos that surrounds the arrival of a new addition to the family, they can sometimes forget very important planning points to complete preferably before, and at latest shortly after, baby arrives. Although no one likes to ponder their mortality, new parents can achieve greater peace of mind by completing their will and power of attorney (POA) documents and securing a life insurance policy.
Many people think mainly about the financial aspects of a will and POA. While it’s important to ensure that your estate and beneficiaries receive the deceased parents’ assets in a timely and cost-effective manner, the more important element here is the ongoing guardianship of the children if both parents pass away.
Costs for a standard will and POA will vary based on the law firm, however $1,000 for completion of these documents for both parents, including storage of the documents at the law firm, is common.
Insurance is important for ensuring that your family has the necessary liquidity to cover final expenses and debts and replace lost income if a parent should pass away. Life insurance coverage and costs will vary based on a variety of factors; however, at a bare minimum, you can protect your family with low-cost term insurance for a specified time period (10, 20 or 30 years).
Insurance coverage for 20 to 30 years is typically appropriate for a family with children if they are likely to be independent at the maturity of the term and where most or all of the mortgage debts carried by the family will be paid down.
Next steps … are you ready?
Parenting is a rewarding-but-challenging stage of life. Getting ahead of important financial details will reduce the risk of parents running into unpleasant financial surprises after baby arrives.
In addition, planning ahead will allow parents to focus their attention where it matters most: on their growing family.
This article is reprinted from the newsletter BUSINESS MATTERS with the permission of CPA Canada. BUSINESS MATTERS is a bimonthly newsletter prepared by the CPA Canada for the clients of its members.
BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.