Understanding Child Care Expenses

Child Care Expenses Update, 06 November 2014: From 2015, the child care expense deduction has been increased by $1,000 for each category. So if you were deducting child care expenses of $7,000 earlier, from 2015 you can deduct $8,000 from your taxable income. This is part of Prime Minister Stephen Harpers' wider Family Tax Cut strategy design to benefit families and is expected to benefit 1.7 million families across Canada. Read the full tax relief update here.

Child care expenses are expenses incurred on taking care of an eligible child. Examples of these expenses include payments made to caregivers, daycare centers, boarding school, or educational institutes (only for the child care services component), etc. These expenses do not include expenses incurred on education such as tuition fees or amount spent on recreational items such as gymnastics lessons. An eligible child is your child or a child of your spouse or common-law partner. It can also be a child who is dependent on you, your spouse or your common-law partner, but with net income of equal to or less than $11,038.

Note that child care expenses are eligible for tax deduction only if you are incurring the expenses to generate income, run a business, attend an educational program under certain conditions, or undertake research where you may have received a grant. Also, the payments should be made in Canada to a Canadian resident.

How to calculate Child Care Expenses in your annual tax return

You can deduct this amount from your income immediately, resulting in tax savings at your marginal tax rate. The amounts that can be claimed vary based on the child's age. For children aged six or below, you are eligible to claim up to $7,000 per child. The amount is $4,000 per child for children between ages 7 to 16. The amount goes up to $10,000 for children who are eligible for a disability amount. The child needs to be of this age at the end of the taxation year. There is a weekly expense limit specifically for expenses related to overnight camps or boarding schools. This limit ranges from ranging from $100-175 based on the eligibility category. Note that you cannot claim more than two-thirds of your annual income under child care expenses.

Example 1:

  • Your annual income is $50,000, and you have two children - one aged below 6 and one between 7 and 16.
  • You have incurred expenses of $6,000 for the younger and $3500 for the older child.
  • So for tax calculation, you can directly deduct $9,500 from your income.
  • Your taxable income will be $40,500.

Tax efficient child care Expenses

As a couple, the most tax efficient way of claiming child care expenses is via the lowest earner. If you earn $20,000 and your spouse earns $15,000 per year, your spouse should claim the expenses.

Typically, the expenses should be claimed by the spouse with lesser income among the two.

Child Care Expenses when Divorced

If parents are separated, and they share the custody of the child, both parents can claim part of child care expenses. Under certain conditions, you can also claim the child care expenses benefit if you have paid the expenses to a relative aged 18 or above.

How do Child Care Expenses affect your Tax?

Child Care Expenses are deducted from your income. You can calculate the impact of Child Care Expenses on the Tax Calculator (select advanced for Child Care Expenses).

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