Do any childcare affordability measures exist now?
Canadian parents can already deduct the costs of eligible childcare from their taxable income, in a measure designed by the federal government to make the choice between working and staying home to care for a child more neutral, from a financial perspective.
In families with two income-earning parents, eligible childcare expenses must be deducted by the person with lower income. Each year, that parent can deduct up to two-thirds of their earned income for the year, the actual childcare expenses they paid, or a maximum of $8,000 per year for a child under age seven, or $5,000 per year for a child between seven and 16—whichever is lowest. (There are higher deduction limits for parents of children with a disability or infirmity.)
This childcare deduction means the cost of childcare can result in a tax refund. For example, let’s say a parent with a 30% marginal tax rate paid $2,000 in childcare expenses. By deducting that $2,000 expense from their taxable income, they’d pay $600 less in tax that year (as $2,000 x 30% = $600). This deduction makes the after-tax cost of their childcare $1,400, compared to the $2,000 upfront or pre-tax cost.
Reducing taxable income by deducting childcare expenses can also lead to larger benefits delivered through the tax system—such as the Canada Child Benefit, or CCB. The CCB is a tax-free monthly benefit paid to Canadian households with children under 18 and based on the household’s net income (or the total income minus deductions). Technically, the CCB is a refundable tax credit, like the GST or HST credit.
Despite the childcare expense deduction and the CCB, however, many working parents find that their childcare costs are a significant part of their monthly budget when their kids are young—which means it’s no surprise that addressing the affordability of childcare has attracted the attention of the major political parties in their 2021 federal election campaigns.
What are the 2021 campaign promises around childcare?
Here’s what the three main political parties have pledged on childcare affordability:
- The Liberal Party of Canada has promised to build “a Canada-wide, community-based system of affordable early learning and childcare, which aims to achieve, on average, $10-a-day childcare spaces for Canadian families.” This would not happen immediately. As stated in the 2021 Budget, their goal is to achieve a 50% reduction in average fees by the end of 2022, and their ultimate $10-a-day goal by 2025-26. As of the publication date of this article, they’ve signed agreements with provincial and territorial governments in British Columbia, Nova Scotia, Yukon, Prince Edward Island, Newfoundland and Labrador, Manitoba, Quebec and Saskatchewan to help meet that goal.
- The Conservative Party of Canada, in contrast, has taken a different approach to the high cost of childcare. Instead of lowering costs, they are promising to “convert the childcare Expense Deduction (CCED) into a refundable tax credit covering up to 75% of the cost of childcare for lower-income families,” which they say will “increase the support that lower-income families receive by thousands of dollars per year and provide more assistance to almost all families.” Families with kids would get a refundable childcare tax credit as well as the Canada Child Benefit. While not explicitly confirmed yet, the eligible childcare expense limits for the credit calculation are assumed to match the current expense limits for the CCED, and the value of the refundable credit is assumed to range from 75% to 26% based on family income. The refundable credit would be paid out throughout the year rather than as a lump sum, similar to the current CCB payment structure.
What could these campaign promises look like for Canadian families?
To explore what the parties’ proposals might mean for Canadian families, Financial Planning Association of Canada members Jason Watt, Lead Instructor at Business Career College in Edmonton, a leader in training for the financial services and insurance industries, and Aaron Hector, Vice President and Financial Consultant at Doherty & Bryant Financial Strategists in Calgary, ran some numbers for four hypothetical Canadian families.
Our four families live in four different provinces, with varying household incomes, numbers of children and childcare costs: