Efficient Child Care for Tax Purposes

Is there an efficient way to plan child care expenses?

It is important to know what expenses are deductible and what the limitations are to plan efficiently.  Child care expenses are deductible for tax purposes usually by the lower income spouse (there are some exceptions where the higher income spouse can claim, but these are limited). The expenses are incurred in order to enable the parent (or supporting person) to enter into either employment, or to run a business or to attend school (either full or part-time).  Child care expenses for those under 16 years old can be deducted from income to arrive at net income for tax purposes. This lowers the total income that taxes payable are calculated on.  It is important for the taxpayer to understand the limits that these expenses are calculated on in order to maximize the amount of income deductions available.  It is very noteworthy to understand what earned income is because it is part of the equation used to determine your child care expense eligibility.  Knowing the importance of what earned income is and how it relates to your income helps you determine if you have enough income to maximize the limits and deduct the expenses from your income.  Earned income typically includes employment income, income from scholarships or grants, business income and disability pensions.  Notable exceptions from this definition are investment income and rental income (both inactive types of income), which do not increase the amount eligible for child care expenses.  While necessary child care expenses may not meet the maximum thresholds, it is important to be aware of these when making choices and knowing how your spending can affect your taxes at year-end.

What credits and deductions are available that may factor into planning?

The calculation of the amount of your child care expenses are deductible from income is the lower of three possible outcomes: a) the amount of child care expenses actually paid; b) 2/3’s of the taxpayer’s earned income; and c) annual limits enforced by the Canada Revenue Agency.  Let us take a look at each of these individually:

1. The amount of child care expenses are the total paid for eligible child care for your child(ren).  It is important to ask potential child care services if they issue tax receipts to assist you in accumulating your totals paid each year;
2. Earned income is noted above – the accumulated total is multiplied by 2/3s to determine your limit;
3. The annual child care limits are currently:
   1. $8,000 for children aged 6 and under;
   2. $5,000 for children aged 7 to 16 and
   3. $11,000 for children eligible for the disability credit, regardless of age.

Author Sara Jimenez, CPA, CA, CFF, CFE
SG LLP Chartered Professional Accountants