How the $10-a-day child care program can affect your taxes
The new subsidized child-care spaces are indeed a bargain, but they come with reduced tax benefits. Here’s how to optimize your child-care spending.
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The new subsidized child-care spaces are indeed a bargain, but they come with reduced tax benefits. Here’s how to optimize your child-care spending.
Every parent knows how stressful finding the right child-care solution at an affordable cost can be. Recently these costs have started to come down, with the announcement of $10-a-day child-care placements starting to open across Canada. This comes with a little-known tax consequence, however, which can affect your bottom line each month.
Here’s the problem: your child-care expense deduction will decrease if you pay less to your child-care provider. As a result, your taxes payable will likely increase, depending on your income level. A reduced child-care expense deduction will also increase the net income on your tax return. This is the figure your refundable tax credits, like the Canada Child Benefit (CCB) are based on. These important monthly benefits, therefore, could shrink.
To understand this fully, take a look your tax return from last year. The child-care expense used as a deduction is found on line 21400 after being calculated on form T778. Net income is at line 23600. That important line is used for government “income testing” for a number of provisions on the return, including refundable tax credits like the Canada Child Benefit, the Canada Worker’s Benefit and the GST/HST Credit. It will also determine how much OAS (Old Age Security) seniors will get, or whether employment insurance (EI) benefits will be clawed back. Just as important, non-refundable tax credits, like the spousal amount, may be affected.
When your net income goes up because of your lower child-care expenses, these benefits are reduced, unfortunately.
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There is some good news for astute investors, howeve,. To keep your family’s net income low despite the reduction in your child-care expense deduction, make an RRSP (registered retirement savings plan) contribution. The resulting RRSP tax deduction reduces your net income and your taxable income and, in the process, works to increase income-tested refundable and non-refundable tax credits too! Check out how much RRSP room you have on your notice of assessment from the Canada Revenue Agency (CRA) to make the contribution.
The same effect occurs if you can claim a deduction for contributions made to the first home savings account (FHSA). An annual deduction of up to $8,000 may be claimable.
The final way to shore up the tax benefits from your child-care expenses is to make sure you claim all of them and to your best tax advantage.
Child-care expenses are often missed entirely by parents. If this has happened to you, did you know you can go back and adjust prior filed returns to make that claim and receive the tax-credit benefits and tax refunds you missed? Especially if you are a first-time filer, be warned, however, that the claim for child care is complex and often audited. Be prepared to provide receipts to justify your claim.
It’s also important to know that the spouse with the lower income is the one that must claim child-care expenses, except in certain defined circumstances: when the lower earner is unable to care for the children due to a mental or physical infirmity, is in full time attendance at a qualifying school, or in hospital or incarcerated for at least two weeks, for example. Another exception is when there is a breakdown in the conjugal relationship for at least 90 days, but a reconciliation takes place within the first 60 days of the year. The usual $5,000, $8,000 or $11,000 maximum amounts claimable by the higher earner may be reduced, however, with a maximum weekly calculation.
There are also specific eligibility rules for calculating the qualifying earned income used in this calculation, for the child-care provider(s) and for the qualifying dependants as well. Some of the most common criteria are described below.
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What is qualifying income? Parents who must pay another person or organization to care for their children so they can work (including self-employment gigs), attend school or carry on research (if a research grant was received) can make the claim. Notably, employment insurance does not qualify.
For whom? The children being cared for must be dependants under the age of 16 (at any time during the year) or dependants of any age who are physically or mentally infirm. An eligible child must be your child or that of your spouse or common-law partner or a child dependent on you, your spouse or common-law partner.
Who are eligible child-care providers? Child-care services must be provided in Canada. This can be at a day nursery school or daycare centre, a day camp or day sports school, a boarding school or camp (including a sports school where lodging is involved) or an educational institution set up for these purposes.
The caregiver, of course, can also be an individual who comes to your home, or to whose home the children are brought for care. But this individual cannot be the child’s father or mother, or someone who claims a personal amount for the child. It also can’t be a sibling or someone under 18 years of age if related to the taxpayer. It’s no problem to pay an unrelated person under age 18, however, or a related person over 18. (Read that last part out loud.)
The following are expenses that may be claimed:
Clothing, transportation, tuition and any expenses that are not actually paid or were reimbursed are not deductible. Medical or hospital care should be claimed under medical expenses.
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