Efficient child care for tax purposes

Child care expenses may be deductible for tax purposes, but there are some exceptions. Learn how to identify limitations and plan efficiently.

Is there an efficient way to plan child care expenses?

It is important to know what expenses are deductible and what the limitations are in order 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 employment, run a business or attend school (either full or part-time).

Child care expenses for those under 16 years of age can be deducted from income to arrive at net income for tax purposes. This lowers the total income that taxes 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 important 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 that is deductible from income is the lower of three possible outcomes:

  1. the amount of child care expenses actually paid
  2. two-thirds of the taxpayer’s earned income
  3. annual limits enforced by the Canada Revenue Agency

Let us take a look at each of these individually:

  • The amount of child care expenses is 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.
  • Earned income is noted above — the accumulated total is multiplied by two-thirds to determine your limit.
  • The annual child care limits are currently:
  • $8,000 for children aged six and under
  • $5,000 for children aged seven to 16
  • $11,000 for children eligible for the disability credit, regardless of age

Age is based on the age of the child at December 31st  (the end of the year). Expenses claimed for overnight camps or boarding school have further limitations of $200 per week for children six and under, $125 for children aged seven to 16 and $275 for children eligible for the disability credit.

2016 is the last year for the Child Fitness ($500) and Child Arts ($250) tax credits, both of which were removed for the 2017 and future taxation years. Any receipts for fitness and arts must be used toward child care expenses first, and then any excess can be applied to these tax credits.

Keep the conversation going

Planning ahead to know how to maximize child care expense deductions for the amounts you are paying for necessary child care can help reduce net income for tax purposes, and ultimately the tax you pay. How does having information on these credits help you plan for your child care needs?  Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Sara Jimenez, CPA, CA, CFF, CFE

Partner, SG LLP Chartered Professional Accountants