Moore
February 2022 Newsletter

Child care expenses are normally deductible for income tax purposes. However, as discussed below, there are some significant restrictions.

Eligible child care expenses

Child care expenses eligible for the deduction include costs for a nanny, day care, and baby sitting. They also include costs paid for a boarding school or camp for child care services, although as discussed below, the amount of these latter costs that can be claimed is limited.

Generally, the expenses must be incurred for the purpose of enabling you or your spouse or common-law partner to carry on employment or a business, or to attend secondary or post-secondary school. (For the remainder of this discussion, “spouse” includes a common-law partner.) For the 2020 and 2021 taxation years, due to the COVID-19 pandemic, if you received federal employment insurance benefits or Québec parental employment insurance benefits or certain similar benefits, the expenses may still qualify if you did not meet this purpose test.

The person or entity providing the child care services normally must be resident in Canada. There are a couple of exceptions to this rule. The first exception is if you are physically residing in another country but remain resident in Canada for tax purposes. The other exception applies if you live near the border of Canada and the US, basically if the US child care provider is closer to your residence than a care provider in Canada.

You must obtain a receipt issued by the child care provider, and if they are an individual, you must obtain their social insurance number if they are resident in Canada.

Eligible child

Your child or your spouse’s child is an eligible child for a taxation year if they are under 16 years of age at anytime during the year, or dependent upon you or your spouse and have a mental or physical infirmity.

Calculation of deductible amount

The general limitation for a year is the least of the following:

1) The child care expenses paid in the year;

2) The total of the “annual child care expense amounts” for all your children (see below); or

3) Two-thirds of your “earned income” for the year.

For item 1), child care expenses paid means your actual expenses paid, subject to a deeming rule that limits your claim for fees paid for attendance at a boarding school or camp. For such fees, regardless of what you actually paid, the allowable amount of the child care expense is limited to:

  • $275 per week of attendance if the child is disabled and eligible for the disability tax credit, or otherwise
  • $200 per week if the child is under 7 years old at the end of the year
  • $125 per week for any other eligible child.

For item 2), the annual child care expense amount is

  • $11,000 if the child is disabled and eligible for the disability tax credit
  • $8,000 if the child is under 7 years old at the end of the year
  • $5,000 for any other eligible child.

Note that these annual amounts apply based on the number of children you have, even if you are not paying any child care expenses for one or more of the children. For example, if you have a 15-year-old for whom you pay no such expenses, that child still gives you $5,000 of “room”, which you might be spending on a younger child.

For item 3), your earned income includes income from employment or a business, and disability pension under the Canada Pension Plan or Quebec Pension Plan (plus a couple of other miscellaneous items). It does not include passive forms of income like interest, dividends, or capital gains. For the 2020 and 2021 years, because of the Covid-19 pandemic, earned income also includes federal employment insurance and Quebec parental employment insurance.

Example

I am a single parent with two healthy children aged 5 and 12. My earned income for the year is $90,000. In the year I incur $18,000 in daycare and babysitting expenses. I also sent my 12-year-old to an overnight camp for two weeks, which cost me $3,000.

My deductible amount is the lesser of:

1) $18,000 + ($125 x 2) = $18,250 (the deeming rule for the camp means only $125 per week is allowed for that)

2) $8,000 + $5,000 = $13,000

3) 2/3 x $90,000 = $60,000

I can deduct only $13,000, even though I incurred more than that in child care expenses. Because of the limitations, many parents end up in this situation.

Further restriction if married or common-law

This is where it gets even more restrictive because the general rule is that only the lower-income spouse can claim the deduction. This rule results in a lower deduction because of the “earned income” limitation. As an extreme example, if the higher income spouse has $90,000 earned income but the lower income spouse has no earned income, there is no deduction (2/3 x $0 is $0).

However, in some cases the higher income spouse can claim a limited deduction. This will be the case if during the year the lower income spouse was either:

  • Attending secondary or post-secondary school;
  • Incapable of caring for the children because of a mental or physical infirmity and being confined for at least 2 weeks in the year to a bed, wheelchair or as a patient in a hospital; or likely to be for a long, continuous and indefinite period, incapable of caring for children, because of their mental or physical infirmity; or
  • In prison for at least 2 weeks in the year.

In any of the above situations, the higher-income spouse can claim a deduction based on the general formula above.

The lower-income spouse may claim a deduction under the general formula, net of whatever the higher income spouse can deduct.

Example

My earned income for the year is $60,000.

My spouse’s earned income for the year is $90,000.

We incurred $20,000 of otherwise eligible child care expenses. We have two healthy children, aged 5 and 12.

During the year, I attended university full-time for 12 weeks.

My spouse, the higher-income earner, can deduct the following amount:

Least of

1) $20,000 eligible child care expenses

2) $8,000 + $5,000 = $13,000

3) 2/3 x $90,000 earned income = $60,000

4) ($200 + $125) x 12 weeks = $3,900

I would then use the general formula to calculate my deduction, which would be net of the $3,900 allowed to my spouse.

Last modified on February 11, 2022 12:00 am