School is quickly coming to a close. I'm looking forward to it – I'll have a chance to do some fun things with the kids. Carolyn, on the other hand, is not so keen. She's at home with them all the time, and deals with all the misbehaviour while I'm gallivanting around eating at nice restaurants and staying in nice hotels for work. I can't wait to spend time with the kids. She can't wait to ship them off to Siberia.
Then there are the many families who have difficulty finding a place to park their kids over the summer months. When both spouses work, and the kids are young, someone has to look after them. Child-care costs can skyrocket this time of year. In my view, the tax rules around child care expenses should be simple enough that your kids can understand them. Not so. Seems that you have to be a rocket scientist to understand it all. So, Let's talk about child-care expenses and some strategies to consider.
The rules
Who can claim child-care expenses (CCEs)? First, you've got to incur the 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.
Generally, anyone who lives with an eligible child and incurs CCEs can make a claim. The person who claims the deduction must have personally paid the costs unless there is 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 end of the year, who is a parent of the child or is your spouse or common-law partner.)
Now, 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.
As for the amount you can deduct? Your deduction cannot exceed the least of three amounts: (1) your actual CCEs, (2) two-thirds of your earned income for the year, and (3) $7,000 for each child under the age of 7 at the end of the year, $4,000 for each child 7 years or older at the end of the year and under age 16 at any time in the year, $4,000 for each child age 16 or older throughout the year who had a mental or physical infirmity and is dependent on you, and $10,000 for each child, of any age, where the child has a severe and prolonged mental or physical impairment.
What types of CCEs can be claimed? Costs include babysitting, day nursery schools, daycare centre fees, fees at educational institutions (the portion that relates to child-care services), day camps and day sports schools, and attendance at a boarding school or camp. When it comes to camps and boarding schools, there's a maximum claim of $175 per week for children under the age of 7 or children who have mental or physical disabilities, and $100 per week for other kids. The $100 or $175 limitation doesn't apply to a day camp, but only to overnight camps or schools.
Sorry, you can't claim CCE payments made to you, another supporting person of your child, or to your other kids under age 18. You may be able, however, to claim payments to other children of yours who are 18 or older and looked after the younger eligible kids.
The strategies
If you're self-employed, be sure to pay enough salary to the lower-income supporting person to allow that person to fully claim all the CCEs that are incurred. Keep in mind, as well, that CCEs won't qualify as a business expense (It's been tried before – and taxpayers have failed). Also, be sure to report all your children who were 16 or under in the year on your tax return, regardless of whether you incurred child care costs for all of them. The taxman doesn't trace specific expenses to specific children, so listing all your eligible children may increase the total costs you can claim.
Finally, be sure to file Form T778 with your tax return to make a claim for CCEs.
Tim Cestnick is president and CEO of WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
Tim Cestnick