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Ottawa’s child care tax deduction is out of touch with reality, analysts say

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While economists like to model the world with the assumption that everyone has full information, the reality is that most people learn the details of policy with experience. As Canada Revenue Agency's 2012 income tax filing deadlines loom, many of us are learning our income tax parameters.

This is the first year I have the opportunity to claim a full year's child care expenses. In preparing my claim, I realized the maximum child care deduction was only $7,000. In some provinces, this may seem adequate. In Ontario, this seriously falls short of what is necessary to cover the expenses of full-time child care of any reasonable quality. Most people I know with pre-schoolers in full-time, not-for-profit childcare are paying between $900 and $1,200 per month, per child. Anything less than that, and you would seriously worry about your child's safety. We don't have much data on child care fees across Canada, but my impression is that the Ontario average falls in this range and a few other provinces have similar fees.

What surprised me most was that the federal child care deduction amount has not changed since 1998! The all-items consumer price index in Ontario has increased 36 per cent since 1998. The cost of child care services in Ontario has increased by 56 per cent.

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Quite appropriately, most income tax parameters are reviewed regularly and will account for inflation. We do this to prevent things like "bracket creep" – a situation where individuals whose wage increases match inflation end up paying higher tax rates, despite no increase in their real purchasing power. I spent some time perusing the policy parameters that UBC economist Kevin Milligan prepared for CTaCS, and found only a handful that are not regularly updated to account for inflation.

A few of the boutique tax credits are left out – such as the Volunteer Firefighters Credits and Children's Fitness amounts. Some benefits aren't indexed either – such as the Universal Child Care Benefit. The maximum amount of unused education and tuition credits that a student can transfer has been at $5,000 since 1996. The Year's Basic Exemption for Canada Pension Plan contributions has remained at $3,500 since 1996.

We can debate whether all policy parameters should be designed to account for inflation, and I think we have to look at each policy separately. I just wonder if anyone is regularly having the conversation within government?

Tammy Schirle is an Associate Professors of Economics at Wilfrid Laurier University

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