Tips for child care tax planning

With summer winding down and a new school year on the horizon, it’s a good time for clients to assess their projected child care costs and how they will factor into this year’s return.

Unlike some other deductions, child care expenses cannot be carried over and must be claimed the year they are incurred. This creates some immediacy for clients to take stock of their child care costs, says Christine Van Cauwenberghe, a tax lawyer and director of tax and estate planning for Investors Group.

“You cannot carry child care expenses forward to future years. You must claim them in the year you incur them,” she says. “The key limits are that you can deduct up to $7,000 annually for the child care of any child under the age of seven, up to a maximum $4,000 annually for every child between the age of 7 and 16 and up to $10,000 for any child that is disabled. To be eligible for the disability deduction, the child will need to have a significant disability because they have to qualify for the disability tax-credit.”

Those can be substantial deductions, although not everyone can maximize them. Van Cauwenberghe says they are most beneficial for families that have two working parents earning a decent income, since the deductions must come from the parent who earns the lowest income and cannot exceed two-thirds of his or her income.

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“If there is only one parent who is providing the child care, they deduct it. If you have a two-parent family, where one parent stays home, they are not going to be able to claim any child care expenses. The Canadian Revenue Agency takes the position that they are home to provide child care,” she says. “There are some exceptions to that rule. The higher-income spouse can claim the expense if the lower-income spouse is attending an educational institution or has been determined by a medical doctor to be physically or mentally infirm and incapable of taking care of the children.”

Van Cauwenberghe advises clients and their advisors not to be afraid to use their cumulative maximum limit, versus their individual limits, to get a bigger deduction.

“One tip we give to parents is to report all of their children under the age of 16 on their tax return, whether or not they incurred any [individual] child care expenses for them,” she says. “If it turns out they’ve spent a little bit more than the maximum on some of the younger kids and less than the maximum on the older kids, so long as they have spent more than their cumulative maximum, they’ll be okay if they deduct it.”

This can be applied if, for example, a family employs an in-house caregiver, such as a nanny, who takes a yearly salary. Parents can do this because the CRA doesn’t currently attribute the expenses to any one child; they just want to make sure parents stay within their deduction limits. Nevertheless, Van Cauwenberghe says clients should hold on to all of their child care receipts.

“You don’t have to file your receipts, but you should keep your receipts [in case] you’re ever audited. Expenses have to be legitimate child care expenses,” she says.

Determining what constitutes a child care expense is a rather grey area. Van Cauwenberghe says the CRA will look at a number of factors to determine if a program children are enrolled in is a legitimate child care expense. These include the age of the participating children, the instructor’s qualifications, the extent to which the program is goal oriented, the time that is devoted to the program and the sophistication of the facilities and training.

“For example, if you have a 15-year-old who is at an elite hockey camp, which is a very goal-oriented and highly sophisticated camp, chances are that has much more of an educational or sport-training aspect compared to child care. Most 15-year-olds are more than capable to take care of themselves during the day,” she says. “Whereas if you have a seven-year-old who is involved in a day camp during a week over the summer, the fact that there is a sport element is ancillary to the purpose of the camp, which is to provide child care.”

The difference is that the hockey camp would probably be eligible for the fitness tax credit, which is a maximum of $500 annually per child, whereas the day camp could be included as a deduction under the parent’s annual child care expense limits.

However, summer camps and day camp programs have further limitations upon them. If their primary function is daycare for working parents, then their deduction can be included under the child’s child care deduction expenses. However, the government caps the amount that can be specifically deducted. The deductions are capped at $175 per week if the child is under seven, $100 a week if the child is between seven and 16 and $250 per week if the child is disabled.

“They may not have many other child care expenses, so they fall well within their $4,000 limit, but the CRA says there is a further limit within that of $100 a week if they are between seven and 16,” Van Cauwenberghe says. “Even though the parent might be under their $4,000 limit for the year, they can only claim $100 a week.”

Finally, if parents are enrolling their children in a private school for the upcoming school year, she advises they try to get an itemized breakdown of the tuition bill to determine which portion of the expenses are for child care.

“If your kids are going to public school and you’re writing a cheque for anything, it’s most likely for child care [so it’s a separate bill]. Private schools tend to incorporate all expenses in one bill,” she says. “If some of the money is going to an after-school child care program, see if you can ask the private school to itemize the amount being paid for child care expenses.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(08/07/08)

Mark Noble