Tax Tips and Pits – Important points for childcare deductions

"If childcare is required in order to earn income, the paid expense is deductible against earned income."

If childcare is required in order to earn income, the paid expense is deductible against earned income.

It’s important to define “earned” income.  In this case, income from employment or running a business, plus grants and fellowships related to work are included. A CPP disability pension is also considered earned income.

There are many qualifiers attached to this deduction – some missed during tax preparation that even software doesn’t pick up sometimes.

First, if married, both parents have to be earning income.

And from this, the most often made mistake is to deduct the childcare expense from the higher income earner – makes sense since this would have the most impact on tax savings. In actual fact, Canada Revenue Agency (CRA) requires the expense to be deducted from the lower income earner.

That’s point one.

Exceptions to point one – if the a parent is enrolled in full-time studies (part-time may qualify) for part of the year, is medically incapable of caring for a child, is confined to a wheelchair, bed or hospital for at least two weeks, or is confined to a prison for two weeks or more during the year. If any of these cases apply then the higher income earner can claim the childcare expense.

Point two, the maximum allowable deduction is the lower of the actual childcare expense or two-thirds of the earned income or CRA’s set dollar maximum per child. It’s amazing how easy to miss this point and claim the wrong amount.

A related frustration arising from the maximum allowable claim is the desire to carry forward unused childcare expenses to the next year’s tax preparation.  This is not an option.

Types of services that qualify as childcare expenses include babysitting, day care, nursery school, and a nanny. Camps and boarding schools also qualify, subject to maximum rates. An official receipt from an organization must be provided, and in the case of an individual providing the service, their name and social insurance number needs to be reported on your tax return.

Mom or dad cannot pay the other parent for childcare, but a related person over 18 can be paid and the cost expensed as childcare, assuming of course that person claims it as income.

If you think about this one, it’s not a bad way to “hire” your older kids – they get money that is most likely not going to be taxed and you get a legitimate childcare expense claim. But remember, the kid has to be 18.

Separated parents sharing custody may claim an apportioned amount. Note that it must be a shared custody arrangement. A parent earning income and paying child support but not having custody cannot claim any childcare expense if the child should happen to reside with that non-custodial parent during the year and that parent requires childcare during that time period.

In fact, even if the childcare for the custodial parent is paid by the non-custodial parent, it’s not claimable by the non-custodial parent – an often overlooked rule.

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.