Tax Implications of Paid Paternity Leave for Canadian Fathers - TaxTool.ca (2025)

Paid paternity leave has become an essential part of Canada’s family support system, offering fathers the opportunity to take time off from work to bond with their newborns or newly adopted children. As part of the government’s Employment Insurance (EI) benefits, paternity leave provides much-needed financial support during this special yet demanding time. However, many Canadian fathers are often left wondering about the tax implications of receiving these benefits.

Understanding the tax treatment of paid paternity leave is critical to effective financial planning during and after the leave period. From questions about how the benefits are taxed to the potential impact on other income-tested benefits, this article will explore the various tax-related issues that Canadian fathers need to be aware of before, during, and after taking paternity leave.

Overview of Paid Paternity Leave in Canada

Employment Insurance (EI) Parental Benefits

Fathers in Canada can access paid paternity leave through EI parental benefits, provided they’ve accumulated at least 600 hours of insurable employment in the last 52 weeks or since the start of their last EI claim. These benefits are designed to replace a portion of the father’s income while they take time off to care for their child.

Eligibility for Paternity Leave

To be eligible, fathers must:

• Be a resident of Canada.
• Be a biological or adoptive parent.
• Apply within the eligibility period, usually within 52 weeks of the child’s birth or adoption.
• Meet the insurable hours requirement as set by Employment and Social Development Canada (ESDC).

Types of Benefits: Standard vs. Extended Parental Leave

Fathers can choose between two types of parental leave: standard and extended.

1. Standard Parental Leave: Provides up to 40 weeks of benefits, with no parent allowed to take more than 35 weeks. Benefits are paid at 55% of the father’s average insurable weekly earnings, up to a maximum amount set by the government.
2. Extended Parental Leave: Offers up to 69 weeks, but benefits are paid at a lower rate of 33% of average insurable weekly earnings. This option gives fathers more time off but at a reduced benefit rate.

Difference Between Maternity and Paternity Leave

It’s important to distinguish between maternity and paternity leave. Maternity leave is reserved exclusively for mothers, starting as early as 12 weeks before the baby’s birth, while paternity leave falls under parental leave, which is available to either parent. Fathers can apply for paternity leave once the child is born or adopted, giving them the flexibility to take time off when it’s most needed.

Taxable Nature of Paternity Leave Payments

Is Paternity Leave Taxable Income?

Yes, paternity leave benefits are taxable. The benefits fathers receive during paternity leave are a form of income replacement and are therefore subject to both federal and provincial taxes. These payments are administered through Employment Insurance (EI), and as with regular employment income, taxes are deducted at the source. However, the amount of tax withheld is typically lower than what fathers might expect based on their regular earnings, which can lead to a tax balance owed when they file their income tax return.

How EI Benefits Are Taxed

Paternity leave payments are taxed in much the same way as regular income, but with some key differences. The Canada Revenue Agency (CRA) requires a portion of these benefits to be withheld for income tax purposes. The percentage of tax withheld depends on the father’s total expected income for the year, including any other sources of income, such as employment earnings or investment income.

However, the amount of tax deducted from EI parental benefits is often minimal and may not cover the full tax obligation. Fathers may find that the tax withheld from their benefits is insufficient, especially if their annual income is higher, resulting in a tax bill when filing their return.

Withholding Tax on Benefits

The government automatically withholds a small percentage of tax from EI benefits, but the rate is generally lower than what is withheld from regular employment income. This can create a tax shortfall, particularly if the father has a higher income. Fathers should plan ahead and consider saving a portion of their benefits to cover any additional taxes that may be owed at tax time.

Potential for Income Tax Owing at Year-End

Due to the minimal withholding on EI parental benefits, many fathers are caught off guard by an unexpected tax liability when they file their annual return. Fathers who return to work before the year-end and have a higher combined income may find themselves in a higher tax bracket, further exacerbating the issue. To avoid this, it’s recommended that fathers calculate their potential tax burden early on and set aside funds to cover any taxes owed when filing their return.

Calculating the Tax Impact on Paternity Leave

Step-by-Step Guide on Estimating Taxes for Paternity Leave

Here’s a simple guide to help fathers estimate the tax impact of their paternity leave:

1. Calculate Your Total EI Benefits: Determine the total amount you’ll receive in EI benefits during your paternity leave. For standard leave, this will be 55% of your average weekly earnings (up to a maximum amount), while extended leave will provide 33% of your earnings.
2. Factor in Other Sources of Income: If you plan on receiving income from other sources during the year (such as a spouse’s income or investments), include this in your total income calculation. This will impact your tax bracket.
3. Determine Your Marginal Tax Rate: Use the combined federal and provincial tax brackets to determine what rate your income falls under. Keep in mind that as your income increases, so does the percentage of tax owed.
4. Estimate Taxes Owed on EI Benefits: Multiply your EI benefits by your marginal tax rate to estimate the amount of tax owed on those benefits. Since EI only withholds a small percentage, you may find that you owe more than what was deducted from your benefits.
5. Check Eligibility for Tax Credits and Deductions: Certain tax credits, such as the Canada Child Benefit (CCB), might offset some of the taxes owed. Be sure to account for these in your calculations.

Using CRA’s Online Tax Calculators

The Canada Revenue Agency (CRA) offers online tools and tax calculators that can help fathers estimate the tax impact of their paternity leave. These calculators allow users to input their income, including EI benefits, and provide an estimate of taxes owed at the end of the year. Fathers can use these tools to better plan for their financial needs during their leave.

Impact on Net Family Income and Benefits Like Canada Child Benefit (CCB)

It’s important to consider how receiving paternity leave benefits affects other income-tested benefits, such as the Canada Child Benefit (CCB). Since CCB amounts are calculated based on family net income, taking a lower EI benefit during extended leave could result in an increase in CCB payments. Fathers should factor in how these benefits interact to get a full picture of their financial situation.

Claiming Tax Deductions While on Paternity Leave

Deductions Fathers Can Claim While on Paternity Leave

Even though fathers receive reduced income during paternity leave through Employment Insurance (EI), they can still access a variety of tax deductions that may help to lower their taxable income. Some of the most common deductions that fathers can consider are:

1. Childcare Expenses: Fathers who incur costs related to childcare while on paternity leave may be able to claim these expenses. If the father’s spouse returns to work or school and they need to hire a caregiver or enroll their child in daycare, these expenses may be deductible. However, there are limits on the maximum claimable amount based on the child’s age.
2. Medical Expenses: Any medical expenses incurred during paternity leave for the child or father may qualify for a tax deduction. This includes costs for medical procedures, prescriptions, and other eligible medical services. Medical expenses must exceed a certain threshold (typically 3% of net income or a minimum dollar amount) to be claimable.
3. Disability Tax Credit (DTC): If the child or father qualifies for the Disability Tax Credit due to a disability, this can offer significant tax relief. This credit can reduce the overall taxes payable and, in some cases, be transferred to a spouse or partner if it’s not fully utilized by the father.
4. Home Office Expenses: If the father is working remotely before or after paternity leave and incurs home office expenses, he may be able to claim these expenses as a deduction. This can include utility costs, rent, or internet fees, provided that the space is used primarily for work.

Childcare Expenses

Childcare expenses can be a significant cost for families, particularly during paternity leave when the father may require help caring for the newborn or other children. Fathers can claim up to $8,000 in childcare expenses for children under the age of 7 and up to $5,000 for children between 7 and 16 years old. These expenses can include daycare, nursery school, and certain babysitting services.

It’s essential for fathers to keep receipts and documentation of any childcare costs, as these will need to be submitted to the CRA when claiming this deduction.

Medical and Child-Related Deductions

Medical expenses related to childbirth or care of the newborn may be eligible for tax deductions. These include prenatal and postnatal care, prescription medications, and certain medical devices. Fathers should ensure they meet the CRA’s minimum spending requirement to claim these expenses, as only the amount above the threshold is deductible.

Additionally, if a father’s child has special needs, he may be eligible for other child-related tax credits or deductions, such as the Child Disability Benefit (CDB) or eligible education and therapy expenses.

Paid Paternity Leave and Provincial Tax Differences

Differences in Tax Treatment of Paternity Leave Across Provinces

Each province and territory in Canada has its own set of tax brackets and rates. As a result, the amount of tax withheld from Employment Insurance (EI) benefits can differ depending on where a father resides. Provinces with higher tax rates may lead to a larger portion of EI benefits being taxed, while provinces with lower rates may result in less tax being withheld but potentially more owed at year-end.

For example:

• Quebec: Quebec administers its own parental insurance program, known as the Québec Parental Insurance Plan (QPIP). Under this plan, fathers in Quebec may receive a higher percentage of their average weekly earnings compared to those under the federal EI program. However, Quebec residents also face some of the highest provincial income tax rates, which can impact the overall tax liability on paternity leave payments.
• Ontario: Fathers in Ontario are subject to the federal EI system. The province’s tax rates are moderate compared to Quebec, and Ontario provides additional credits such as the Ontario Childcare Access and Relief from Expenses (CARE) tax credit, which can help offset the tax impact of paternity leave.

Case Study: Comparing Tax Implications in Ontario vs. Quebec

Let’s consider a hypothetical case where two fathers, one living in Ontario and the other in Quebec, take standard paternity leave and receive EI benefits for 35 weeks. Both fathers earn $60,000 annually before taking leave.

• Father A (Ontario): Receives 55% of his earnings through EI benefits during the 35-week leave, which totals approximately $1,034 per week. Ontario’s combined federal and provincial tax rate for his income level is around 29%, with $300 in tax withheld from each weekly benefit. Upon filing his taxes, he might owe additional taxes if the withholding was insufficient for his overall income.
• Father B (Quebec): Receives benefits under the QPIP, where 70% of his earnings are covered for the same 35-week leave. His weekly benefit is approximately $1,269. However, Quebec’s combined federal and provincial tax rate for this income level can be as high as 38%, meaning more taxes are deducted from his benefits, but he may still owe additional taxes at year-end due to the higher provincial tax rate.

This case highlights how provincial tax systems can lead to significant differences in the amount of tax fathers owe on their paternity leave benefits.

Unique Provincial Credits and Deductions

Fathers should also be aware of specific provincial credits and deductions that can impact their taxes while on paternity leave:

• British Columbia: Offers a Provincial Parental Leave Credit, which can help offset the tax on EI benefits.
• Manitoba: Has the Manitoba Child Benefit, which provides additional financial support to lower-income families and can influence tax outcomes during paternity leave.

Potential Changes in Tax Bracket Due to Paternity Leave

How Reduced Income from Leave Can Affect Tax Brackets

When a father takes paternity leave, the EI benefits received are usually less than their regular salary—55% for standard leave or 33% for extended leave. This lower income can push the father into a lower tax bracket, meaning a smaller percentage of their overall income will be taxed at a higher rate. For example:

• A father earning $70,000 annually might find that his income is reduced to $38,500 during paternity leave (assuming standard benefits).
• This lower income could shift him from a higher marginal tax rate of 29% to a lower bracket where he is taxed at 20.5%.

Although a reduced tax rate might sound beneficial, it can also mean that the EI tax withheld will be insufficient to cover the taxes owed for the year, especially if the father returns to work and regains his full salary later in the year. Fathers need to be aware that while their immediate tax bracket may be lower, they may still face a tax bill depending on their total income at year-end.

Example of Tax Bracket Change

Consider a father who earned $80,000 in 2023. In 2024, he takes paternity leave for six months, receiving $40,000 in EI benefits. His overall income for the year is reduced to $60,000. Initially, his income would have placed him in a higher tax bracket, where his marginal rate was 33%. However, with the reduced income, he falls into the 29% bracket for a portion of the year. This might lead to reduced taxes, but the lower tax withholding on EI benefits may still leave a shortfall.

Tips for Optimizing Taxes While on Leave

Fathers can take certain steps to optimize their tax situation while on paternity leave:

1. Adjust Withholding Taxes: Fathers may choose to request additional tax be withheld from their EI benefits to avoid owing a large balance at tax time. This can be done by contacting Service Canada to increase the withholding amount.
2. Plan for Lump-Sum Payments: If a father expects to receive a lump-sum payment when he returns to work (e.g., a bonus or commission), this additional income could push him into a higher tax bracket and increase his tax liability. Fathers should plan for these scenarios by setting aside some of their EI benefits to cover the potential tax bill.
3. Splitting Income with a Spouse: In households where the mother is the primary earner, splitting income between spouses can reduce the overall tax burden. This strategy allows couples to optimize their taxes by transferring taxable income from the higher-earning spouse to the lower-earning one.

Impact of Paternity Leave on Other Benefits and Credits

Interaction with Federal and Provincial Benefits

Certain federal and provincial benefits are based on net family income, and taking paternity leave can temporarily lower a family’s overall income. This reduction can, in turn, make the father eligible for larger payments or new benefits that were previously unavailable due to higher income levels.

Canada Child Benefit (CCB)

The Canada Child Benefit (CCB) is one of the most significant income-tested benefits available to Canadian families. The amount of CCB a family receives depends on their net family income, with lower-income families receiving more substantial payments. When a father takes paternity leave, his reduced income could lower the family’s net income, resulting in a higher CCB payment.

For example:

• A family with two children and an annual net family income of $90,000 may receive $2,000 in CCB payments.
• If the father’s income drops due to paternity leave, reducing the net family income to $70,000, the family could receive an increased CCB payment of $3,500 or more, depending on the children’s ages.

This increase can be a vital source of financial relief during paternity leave, but fathers should also consider how returning to work later in the year could affect the benefit amount for the following year.

GST/HST Credit

The Goods and Services Tax (GST)/Harmonized Sales Tax (HST) credit is another income-tested benefit that can be impacted by a father’s reduced income during paternity leave. Lowering the family’s net income through paternity leave may make the father eligible for the GST/HST credit or increase the amount he receives.

The GST/HST credit is calculated based on family net income from the previous year, meaning that a reduction in 2024 income will affect credit payments in 2025. Fathers can use online calculators provided by the CRA to estimate how their paternity leave might influence their eligibility for this credit.

Provincial Benefits and Credits

Provincial benefits can also be affected by a father’s reduced income during paternity leave. Each province offers its own set of income-tested credits and benefits, such as the Ontario Trillium Benefit or Quebec’s Family Allowance. Fathers who see a drop in their annual income may be eligible for increased provincial support, especially if they have multiple children or live in lower-income households.

How Income Reduction Can Lead to Higher Benefits or Credits

While paternity leave results in lower immediate income, it can lead to significant benefits in the form of increased government payments and credits. Fathers should calculate how their reduced income will impact these benefits and consider factoring this potential increase into their financial planning for the year.

It’s important for fathers to keep in mind that these benefits are calculated based on previous year’s income. For example, the income reported in 2024 will determine benefits in 2025, so any temporary reduction in income due to paternity leave will have lasting effects beyond the leave period.

Long-term Financial Considerations for Fathers

RRSP and TFSA Contributions During Paternity Leave

One of the key areas fathers should focus on during paternity leave is retirement savings. While income might be lower during this time, contributing to tax-advantaged savings vehicles such as the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) can have long-term benefits.

Registered Retirement Savings Plan (RRSP)

Contributions to an RRSP are tax-deductible, which means they reduce taxable income for the year they’re made. However, since income is already lower during paternity leave, it might make more sense to defer RRSP contributions until a higher income year. This allows fathers to maximize the tax savings from RRSP contributions when their marginal tax rate is higher.

Fathers who still want to contribute during paternity leave can do so, especially if they expect to receive a year-end bonus or any lump-sum payments when returning to work. These contributions could reduce the taxes owed on any income earned in the latter half of the year.

Tax-Free Savings Account (TFSA)

Unlike RRSPs, contributions to a TFSA do not provide immediate tax deductions. However, the benefit of contributing to a TFSA while on paternity leave is that investment earnings (e.g., interest, dividends, and capital gains) grow tax-free. Fathers can make smaller, regular contributions to a TFSA during paternity leave without worrying about an immediate tax impact, allowing their savings to grow in a tax-free environment.

For fathers who want to maintain long-term savings during paternity leave without affecting their immediate tax situation, the TFSA is often a more flexible option compared to the RRSP.

Saving Strategies While on a Reduced Income

Managing finances on a reduced income can be challenging, but with proper planning, fathers can still maintain their savings goals. Some strategies to consider include:

1. Create a Budget: Fathers should create a detailed budget that reflects their reduced income during paternity leave. This budget should account for EI benefits, childcare costs, and any additional expenses related to the newborn.
2. Set Up Automatic Contributions: Even with a lower income, setting up small automatic contributions to a savings account, TFSA, or RRSP can help fathers continue building their financial future without overextending themselves.
3. Prioritize Debt Repayment: If fathers have outstanding debt, they might consider using part of their EI benefits to make regular payments. This can help avoid interest accumulation and keep long-term financial goals on track.

Post-leave Tax Planning

Once fathers return to work after paternity leave, they will need to adjust their tax and savings strategies based on their new income situation. In many cases, returning to full-time work will increase income, possibly resulting in higher taxes. Here are some post-leave tax strategies to consider:

• Increase RRSP Contributions: After paternity leave, fathers may want to increase their RRSP contributions to lower their taxable income for the year and offset the increased income from returning to work.
• Review Tax Credits and Benefits: It’s essential to reassess eligibility for benefits like the Canada Child Benefit (CCB) or the GST/HST credit once regular income is restored, as these may decrease as family income increases.

Long-term financial planning requires fathers to think ahead and prepare for how paternity leave may impact their retirement and savings goals.

Common Pitfalls and Tax Mistakes to Avoid

1. Misunderstanding How Paternity Leave Benefits Are Taxed

One of the most frequent mistakes fathers make is underestimating the taxable nature of Employment Insurance (EI) benefits. Since the EI benefits received during paternity leave are subject to tax, some fathers mistakenly believe that the reduced income will result in lower taxes overall. However, as previously mentioned, the tax withheld from EI benefits is often minimal, leaving fathers with a potential tax liability when filing their income tax return.

To avoid this, fathers should calculate the amount of tax likely to be owed and set aside a portion of their benefits to cover any shortfall. Consulting a tax professional or using online tax calculators can help fathers determine the exact amount of taxes they may owe.

2. Failing to Plan for Potential Tax Owing

Because EI benefits typically have lower tax withholding, fathers who do not plan ahead may be surprised by the amount of tax owing at year-end. This situation can be further exacerbated if the father returns to work before the end of the year, increasing total income for that tax year.

To avoid a year-end tax bill, fathers can:

• Request additional tax be withheld from EI benefits by contacting Service Canada.
• Make voluntary tax payments throughout the year to reduce the risk of owing taxes later.
• Set aside a portion of benefits in a savings account, earmarked for any taxes owed.

3. Overestimating Deductions While on Leave

It’s easy to overestimate the amount of deductions and credits available during paternity leave. For example, while childcare expenses and medical deductions can offer tax relief, the amounts claimable are subject to limits and thresholds. Overestimating these deductions can result in a lower-than-expected tax refund or an unanticipated tax liability.

Fathers should keep detailed records of all eligible expenses, but they should also be realistic about what they can claim. Consulting CRA guidelines or a tax professional is recommended to ensure accuracy.

4. Neglecting to Account for Changes in Benefits

As mentioned earlier, paternity leave can affect the eligibility and amount of income-tested benefits like the Canada Child Benefit (CCB) and the GST/HST credit. Fathers who fail to account for changes in these benefits may not optimize their financial situation during leave.

Fathers should review their eligibility for various benefits before and during paternity leave, using online calculators or consulting with the CRA to understand how their benefits may change as a result of their lower income.

5. Ignoring the Long-term Financial Implications of Reduced Income

While paternity leave provides time to bond with a new child, fathers should not lose sight of long-term financial goals. Reduced income during paternity leave can affect savings for retirement, debt repayment, and other long-term priorities. Failing to adjust savings contributions or financial plans during leave can leave fathers unprepared for the future.

Fathers should reassess their financial situation and adjust their savings contributions, whether to a TFSA or RRSP, to ensure that they continue building long-term financial security even while on leave.

6. Not Consulting a Tax Professional

Many fathers attempt to navigate the complexities of taxation during paternity leave on their own, which can lead to missed opportunities for savings or financial missteps. Consulting a tax professional can provide tailored advice and ensure that fathers make informed decisions about tax planning, benefits, and long-term financial considerations.

Frequently Asked Questions (FAQ)

1. Can I reduce the withholding tax on paternity leave benefits?

Yes, you can request additional taxes to be withheld from your Employment Insurance (EI) benefits to avoid a large tax bill at year-end. This can be done by contacting Service Canada and asking for an increased withholding amount. By doing so, you can ensure that you won’t owe a large balance when you file your taxes, especially if you plan to return to work before the year ends.

2. Will taking paternity leave affect my ability to claim child-related tax credits?

No, taking paternity leave does not disqualify you from claiming child-related tax credits. In fact, because your income may be reduced while on leave, you may be eligible for higher payments from income-tested benefits such as the Canada Child Benefit (CCB). However, it’s important to account for any changes in your family’s net income, as this will impact the benefits and credits you’re eligible to receive.

3. Is there a way to defer taxes on EI benefits?

Unfortunately, there is no way to defer taxes on EI benefits directly, as they are treated as taxable income. However, you can minimize your overall tax burden by making RRSP contributions, which reduce your taxable income. Additionally, planning ahead by saving for any potential tax liabilities can help ease the financial impact when filing your taxes.

4. How does my spouse’s income affect the tax implications of my paternity leave?

Your spouse’s income can impact several tax-related aspects of your paternity leave. First, family net income is used to calculate certain benefits like the CCB, so if your spouse’s income is high, it may offset the reduction in your income due to paternity leave, resulting in smaller benefit increases. Additionally, in cases where your spouse earns significantly more, you may want to explore income-splitting strategies to reduce your household’s overall tax burden.

5. What happens if I return to work partway through the year?

If you return to work during the same tax year after taking paternity leave, your total income for the year will include both your Employment Insurance (EI) benefits and your employment earnings. This could push you into a higher tax bracket, resulting in more taxes owed. Planning for this eventuality, such as requesting higher tax withholdings or setting aside some of your EI benefits, can help ensure you’re not caught off guard by a higher tax bill.

6. Will taking paternity leave reduce my future RRSP contribution room?

No, taking paternity leave will not reduce your future RRSP contribution room. RRSP contribution limits are calculated based on your previous year’s earned income. Since Employment Insurance (EI) benefits do not count as earned income, they do not generate RRSP room. However, any RRSP room you had before taking paternity leave will carry forward, and you can use it in future years once your earned income increases again.

7. What happens if my paternity leave extends into the next tax year?

If your paternity leave extends into the next tax year, your Employment Insurance (EI) benefits will be reported over two tax periods. This means your reduced income may be reflected across both years, potentially impacting your tax brackets, benefits, and credits for two tax years. Planning for both years’ tax returns will help ensure you make the most of available tax credits and benefits.

8. Are there any special provincial programs or credits I should be aware of during paternity leave?

Yes, several provinces offer specific tax credits or programs that could benefit fathers on paternity leave. For instance, Quebec’s Québec Parental Insurance Plan (QPIP) provides higher benefits than the federal Employment Insurance (EI) program. Other provinces, such as Ontario and British Columbia, offer childcare and parental tax credits that can further reduce your tax liability. It’s a good idea to check with your province’s tax authorities for details on any specific programs that might apply.