Wealth Strategies: Maternity/Parental Leave - Strategies To Capitalize On

Maternity or parental leave is not always planned; however, there are several ways one can still take advantage of a lower year(s) of taxable income for those with salary levels at higher marginal tax rates.

Maternity, or parental Employment Income benefits received are considered “special benefits” as per CRA, and there isn’t any claw back of this type of Employment Income benefits. Maternity leave benefits are considered taxable income with taxes withheld at source. Employment Income maternity and parental benefits are to a maximum of 55% of your earnings, up to a maximum of $595 week. Maternity leave benefits have a maximum of 15 weeks and then move to standard parental benefits for up to 40 weeks (in most scenarios). One parent can only have a maximum of 35 weeks for parental benefits. Additional parameters exist for more specialized situations such as adoption. Some employers also offer a maternity leave top-up, which would also form part of one’s taxable income.

Given that maternity or parental benefits fall under special benefits, triggering other types of income or capital gains such as exercising stock options or ESPP (employee share purchase plans) won’t reduce the maternity leave benefit. This scenario creates a potential opportunity to take advantage of a lower level of taxable income compared to the individual’s normal salary and marginal tax rate.

Triggering stock options is one such opportunity, which creates a taxable benefit and is taxed as employment income and subject to CPP and income tax withholding at source prior to distribution to the employee. This profit increases overall taxable income and therefore the marginal tax rate depending on the amount triggered. Stock options do, however, have an offsetting 50% deduction, bearing in mind a new annual limit of $200,000 for preferential tax treatment for those that vest from July 1st, 2021 onward.

Employee share purchase plans (ESPP’s) are another potential opportunity and typically have two forms of taxation. The first possibility is a taxable benefit upon distribution of the shares, often in a regular distribution by the employer ie. monthly, of the differential between the actual share price and the reduced price at which it was issued to the employee by the employer. Secondly, a capital gain (or loss) will be triggered when the shares are later sold, for which the adjusted cost base is the actual share price when the shares were issued (not the reduced price) versus the price they’re later sold at. Capital gains are taxed at a preferential and reduced amount of 50% of the total amount.

Whether taking a parental leave, returning to university, or planning for your retirement, reviewing potential consequences in advance with a professional(s) is part of prudent financial preparation.