Childcare Expenses

Childcare Expenses

There are many expenses that qualify for a tax deduction. Some of the most common ones are daycare and camps.

In order to qualify for a deduction, the expense must be incurred to allow you to go to work. In addition, the CRA only allows it to be deductible against the lower income spouse’s earned income. An exception is made if the lower income person was going to school, had a physical or mental infirmity or confined to a hospital or similar institution. Earned income for the purposes of claiming childcare costs are T4 income, self-employment income or scholarships and bursaries.

Other limitations to consider are:

• CRA limits the annual amount you can deduct to $7,000 for children 6 and under and $4,000 for children aged 7 to 16.
• If your child is special needs, you can deduct up to $10,000 a year regardless of age.
• As with all tax deductible expenses, you need to keep receipts.
• CRA also limits the childcare costs to 2/3rds of the lower income spouse’s earned income. Remember that dividends are not earned income.

Hiring a Nanny

Some busy couples, particularly professional couples, may find hiring a nanny to care for their children to be a practical solution to their childcare needs. If you have a live-in nanny, this would eliminate the need to drive your children to a daycare or childcare centre. These costs are tax deductible (and subject to the limitations described above) if they are incurred to allow the lower income spouse to go to work.

If the nanny works primarily for you, then you are the employer and the nanny is an employee. Therefore, you would have to obtain a payroll number from the CRA, pay the nanny as an employee and withhold income taxes, CPP and EI from their regular payroll. You would then have to submit these monthly remittances to the CRA. Additionally, as the employer, you would be required to pay the employer portion of CPP and EI and remit that monthly to the CRA. By the end of February of each year, you would be responsible for issuing a T4 slip for the nanny as well. Also, you are required to register with the WCB since you now have an employee. TPC can help you with any of these tasks.

Fitness and Arts Credit

If your children are enrolled in a regular program related to fitness, sports or arts, you are allowed to claim up to $500 credit per child per year for registration in these activities. Note, if you child does both fitness and arts related activities that qualify, then you could claim up to $1,000 credit for that child. This corresponds to $75 per child in federal tax reductions.

There are a few rules to keep in mind:

• Child must be under 16 at the beginning of the tax year.
• Activity must last for 8 consecutive weeks with at least one session per week or last 5 consecutive days.
• Activity must be supervised.
• Activity must be suitable for children.

Child Amount Tax Credit

All Canadians with children who were under 17 years old at the beginning of the tax year can claim a $2,191 credit for each child. If one spouse earns more than the other, the higher earning spouse should claim these credits. The CRA increases this amount for inflation each year. This will reduce your federal tax by $319.