Kids cost you. And the Canada Revenue Agency recognizes some of the expenses parents absorb by allowing deductions for them.
Fortunately, child-care costs are not non-refundable tax credits, but rather are a direct deduction. This means rather than a percentage of the cost, each dollar of expense, to a specified limit, is netted against earned income.
An eligible child must have been under 16 at the beginning of 2010 (unless disabled) and have net income in 2010 less than the basic personal amount.
Eligible child-care expenses include day-care centres, individuals, day camps and day sports schools, private school tuition for child care, boarding schools, and overnight sports schools and camps.
Payments for child-care services provided by a related person who is at least 18 are eligible for the deduction as long as you or your spouse did not claim a tax credit for that person.
The child-care expense has to be claimed by the parent with the lower net income, unless that parent is medically incapable of caring, or if the lower income parent is at school full-time for a minimum period of three weeks. Separated parents sharing custody may claim an apportioned amount.
Now onto the cost of the endless opportunities for activities for kids. A claim may be made up to $500 per child for the fees paid for a child in a prescribed program of physical activity. However, this is a non-refundable tax credit rather than a direct deduction like child-care expenses, meaning that only 15 per cent of these expenses eventually make it through to the bottom line. So the effective credit maxes out at $75 per child.
To qualify, it must be a supervised activity suitable for children, ongoing for at least eight weeks, or in the case of a camp, five days. CRA states that it must be a “cardiovascular activity that also includes at least one of muscular strength, muscular endurance, flexibility or balance.”
In addition to the obvious organized sports, other eligible activities for this credit include golf lessons, horseback riding, sailing, bowling, and extracurricular school sports. This does not include travel or accommodation costs. Any activity involving the use of a motorized vehicle is not eligible.
And when they hit post-secondary education . . . Tuition paid is reported on form T2202, as is the number of months of part-time and full-time schooling. The allowable deduction for months at school is $120/month part-time and $400 full-time, even if income is earned during these months.
However, if grants were paid during these months, this deduction is not allowed. There is also a book allowance of $20/month or $65/month based on part-time or full-time schooling, respectively.
The student can use this non-refundable tax credit (15 per cent) to reduce current tax liability or carry it forward when income may be higher. Regardless of income, a student must file each year they can claim an education deduction. If this has been missed in prior years, don’t panic. A T1 adjustment can be done.
Up to $5,000 can be transferred to a parent or grandparent using Schedule 11, but only for the year in which the education expenses were incurred. In other words, amounts carried forward by the student cannot be transferred in future years. Before the transfer, CRA requires the student to use as much of the credit as it takes to reduce their tax liability to zero.
In addition to these deductions, students can claim interest on government student loans as well as perhaps make a claim for moving, child care, and public transit expenses. These however, cannot be transferred.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca