Most parents are aware that there is some relief from the high cost of childcare through the deduction of childcare expenses from personal taxable income. Given that centre staff are often asked questions on this topic, we thought it would be useful to review what expenses are deductible, when may they be deducted, how much may be deducted and who may claim the deduction?
What expenses are deductible?
Deductible childcare expenses include:
- all costs of day nursery care and babysitting
- for camps and boarding schools an amount is allowable. Visit http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-09e.pdf for the amounts deductible
- generally, childcare payments made to any person who is a deemed resident in Canada except:
- the father or mother of the child
- a person under the age of 18 who is related to a parent of the child (for example, a sibling)
- a supporting person who either claims a dependant deduction for the child or deducts the child care expenses of the child
When may expenses be deducted?
Childcare expenses may only be deducted in the year in which they have been paid. If you pay for December care in January or later then you are not able to deduct that care in the December year; you must wait until the following year. Consequently, it is important for supporting persons to ensure that childcare payments are up-to-date each year in order to be eligible for the maximum deduction.
Expenses must be supported by receipts even though the receipts need not be filed with the taxpayer’s personal tax return. The receipts should include:
- the name of the organization or person providing care (if it is an individual then their Social Insurance Number must also be included)
- the names of the supporting person and child
- the amount paid for childcare in the year
- the date of the payments
- the signature of the person who provided the childcare services or a signature on behalf of the day nursery.
Not receiving a receipt does not mean that you are denied the deduction for childcare. It does, however, mean that you will have a more difficult time supporting your claim should Canada Customs and Revenue Agency ask for proof of payment.
How much may be deducted?
The maximum annual deduction available to parents is the lesser of:
- See http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-09e.pdf for the amounts deductible this year.
- Two-thirds of the earned income of the person claiming the deduction. Earned income as defined in the Income Tax Act includes:
- wages, salaries and related taxable benefits
- profit sharing received from employment earnings
- certain disability payments payable under the Canada Pension Plan
- certain training allowances
- taxable amounts of research grants, bursaries and fellowships
Who may claim the deduction?
The supporting person (not to be confused with the “parent”) with the lowest net income before the childcare deduction is the only person that may claim the expenses. Note that claiming childcare may be beneficial even if one of the members of a couple has no tax to pay. Claiming the deduction could increase the spousal/common law deduction available where one of the tax paying partners earns between approximately less than the maximum threshold per year even though the low income earner has no tax to pay.
An exception to the low income earner being the only one eligible to claim the expense occurs in two partner families where one of the partners is a full-time student while the other is in the work force. In this case, the working partner may claim the deduction while the other is at school. Full-time attendance at school is defined as enrolment in an educational program that lasts at least three weeks and requires that the individual spend at least ten hours a week on courses or work in the program.