My kids can drive me nuts. I often wonder if it's me with the problem. I was speaking to my neighbour, who's a psychiatrist, about it. "John, I think I'm being reasonable. I think my kids are just being defiant," I said. "Tim," John replied, "your kids are fine and normal; you're the one who's crazy."
"I want a second opinion," I told him. Then he said, "Okay, you're ugly too."
Regardless of how my kids behave, I'm still glad I've got them. They've saved me thousands in tax over the years (among other benefits). Child-care expenses are just one of those costs that we've been able to deduct, and there were changes to this deduction announced last fall, so I think it's time to revisit how child-care expenses work.
The rules
Let's start with who can claim child-care expenses (CCEs). If you're someone who has incurred CCEs to allow you to earn income from your employment or self-employment, obtain certain occupational training, carry on grant-funded research, or attend school under certain conditions, then you can deduct CCEs.
In order to claim these costs, you have to be living with the child and you must have personally paid the child-care costs, unless there's more than one supporting person, in which case the supporting person with the lower income must claim the expenses. A "supporting person" is generally anyone who lived with you at any time during the year, and at any time within 60 days following the year, who is a parent of the child or is your spouse or common-law partner. Clear as mud?
By the way, there's an exception to the "lower income" rule: The higher income supporting person can claim the CCEs during a time when the lower income person was attending a designated educational institution, was in prison or a similar institution for at least two weeks, was incapable of caring for your child due to a mental or physical infirmity, or was living apart from you for at least 90 days due to a breakdown in your relationship.
How much can you deduct? Here's where the rules have changed recently.
For 2014, the maximum you can deduct is the least of three amounts: (1) the total amount spent on child care expenses, (2) two-thirds of the lower-income taxpayer's earned income, and (3) the maximum dollar limit for your children ($7,000 for each child under age 7 at the end of the year; $4,000 for each child aged 7 years or older at the end of the year and under age 16 at any time in the year, and for infirm dependent children over age 16; and $10,000 for children who are eligible for the disability tax credit, regardless of their age).
On Oct. 30, 2014, the government announced that these dollar limits would be increased for 2015 by $1,000 – to $8,000, $5,000, and $11,000 respectively.
The expenses
The types of expenses you can claim include babysitting, day nursery schools, daycare centre fees, fees to schools (the portion that relates to child-care services), day camps and day sports schools and attendance at a boarding school or camp. As for overnight camps and boarding schools, the maximum claim is $175 a week for each child under age 7 or children with mental or physical disabilities, and $100 a week for other kids (these limits don't apply to day camps or schools).
The strategies
It's a good idea to ensure that the lower-income supporting person has sufficient income to allow that person to fully deduct all the CCEs incurred. Otherwise, you're wasting good deductions. This could mean paying a salary to that person if you're self-employed, or perhaps he or she can work elsewhere.
If you're thinking of deducting CCEs as a business expense, don't bother. It's been tried. Court decisions have ruled against taxpayers in these cases.
You're able to pay your child who is 18 or older to look after those who are 16 or younger, and you'll be entitled to claim a deduction if you otherwise meet the criteria. The child earning the income will have to report it, but might not pay any tax if he or she has little other income.
Finally, be sure to list all of your children who were 16 or younger in the year on your tax return, even if you didn't incur CCEs for them. The taxman won't trace specific expenses to specific children, so listing all eligible children can increase the total costs you're entitled to claim. And don't forget to file Form T778 with your tax return to deduct your CCEs.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.
Tim Cestnick