This tax season, challenging your knowledge on personal tax might be enlightening. Here is another in a series of typical tax planning and preparation situations to test you.
You and your spouse both work, you make $50,000 and your spouse makes $20,000. You have a three-year-old child and childcare costs are $1,000 per month so $12,000 annually. Can you deduct the childcare cost as the higher income earner?
No you can’t. But your spouse can.
The lower income earner is allowed to make the claim, but only to a maximum of $8,000 as per Canada Revenue Agency (CRA) rules.
Noteworthy, if the child were 7 to 15 years of age, the maximum claim for that child would be $5,000. A disabled child qualifies for an $11,000 claim, regardless of age.
Having said this, there is a maximum claim threshold defined by two-thirds of the lower income earner’s income, so in this case the maximum allowable claim would be $13,333, therefore the $8,000 maximum would still apply.
Variation on the above scenario. Let’s add a second child to the family who is 14 years of age and doesn’t require any childcare. The rest of the family situation is as described before. What is the maximum allowable childcare expense claim?
As before, any claim must be applied to the lower income earner. However, the maximum claim for the household is now the younger child’s $8,000 plus the older child’s $5,000 for a total of $13,000 maximum.
Given the $13,000 maximum, the full $12,000 childcare expense can be claimed even though there is no childcare expense directly associated with the 14 year old child.
In other words, the calculation of the total childcare expense claim includes the addition of all allowable maximums for all children aged 15 and under. Of course the maximum allowable claim amount is subject to the two thirds lower income earner rule.
Okay, a third scenario. Only one parent works in the house. What is the maximum allowable childcare expense claim?
If you said zero, you are correct. Both parents must be working to make a childcare expense claim.
Or, do they really both have to be working? Here’s scenario four, one parent is working and the other is enrolled in school. Or both parents are in school.
The childcare expense claim can be made with parents in school, but only if the parent or parents are enrolled in full-time studies. Part-time enrollment disqualifies a childcare expense claim.
Scenario five. In the case of a single parent who is working or is a full-time student, the childcare expense is allowable to the maximum described previously.
And the final scenario. A parent earning income with a home based business. This does meet the definition of a working parent so the childcare expense claim will qualify subject to the CRA rules previously described.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.