Child Care Expense Claims

Essential Tax Facts,

“Specifically, the definition of net and earned income for the purposes of claiming child care has generated some questions,” says Mrs. Jacks, “It is also important for parents to review who should claim child care expenses this year, who should report the new Universal Child Care Benefit, apply for the Child Tax Benefits and then determine the best course for their RRSP contributions to maximize all these social benefits.”

Of note: the definition of net income for child care expenses—the number used to calculate who will claim child care on the return--will not include the new Universal Child Care Benefit. These benefits should be invested in an untainted account in the name of the child to circumvent attribution rules on investment income reporting.

For 2007, the definition of earned income—the number used in determining the maximum amount of the child care expense claim--will however include income received under the Apprentice Incentive Grant program (net of any repayments). This grant is to be established as of January 1, 2007, and, as per details on the HRDC website, will provide direct support to apprentices in the first two years of an approved apprenticeship training program. This includes Red Seal Trades (Red Seal trades) and other economically strategic apprenticeship programs.

ESSENTIAL TAX FACTS: CHILD CARE EXPENSE CHECKLIST

Calculate this lucrative deduction on Form T778 and on Line 214 of the T1 Return. See form T778 for 2006 at this link: www.cra-arc.gc.ca/E/pbg/tf/t778/t778-06e.pdf

• Eligible Taxpayers. Costs must be paid to earn income from employment or self-employment or so that taxpayer may attend school either full or part time or carry on research under a grant.

• Eligible Dependants. Under the age of 16 (at any time during the year) or who are physically or mentally infirm (no age limit). Must be your child, or that of your spouse or common law partner’s child or a child who was dependent on you/spouse. Otherwise child’s net income must be less than basic personal amount ($8839 in 2006)

• Eligible Babysitters. Expenses actually paid to a Canadian resident or paid to a non-resident for services outside Canada for a resident or deemed resident of Canada. Babysitters may be related to you, but if they are, the sitter must be over age 17. Payments made to a parent of the child or to a supporting person are not deductible; nor are payments to those who are claimed as a dependant by the taxpayer. The cost of paying a non-related nanny, however, including all benefits paid under source deductions, is deductible; as are payment to day nursery schools and centres, educational institutes and after-school activities providers, day camps and day sports schools where primary goal is to provide care, and boarding schools, overnight sports schools or camps. Receipts are required and in the case of an individual, the Social Insurance Number must be provided.

• Earned Income Definition. Includes salaries and wages, net profits from self-employment, training allowances, the taxable portion of scholarships, bursaries, fellowships and research grants, (note however that for 2006 and subsequent years most of these sources are tax exempt) and disability pensions under CPP or QPP. This definition will not, however, include benefits received from the new Universal Child Care Benefit. For 2007 the amounts will include income from Apprenticeship Incentive Grants net of repayments.

• Special Rule for Students who are Parents. Full time students: are limited to: $100 for each child age 7 – 16 for which the disability amount cannot be claimed, plus $175 per child under 7 for which the disability amount cannot be claimed, plus $250 per disabled child times the number of weeks of full-time attendance. Part time students are limited to: $100 for each child age 7 – 16 for which the disability amount cannot be claimed, plus $175 per child under 7 for which the disability amount cannot be claimed, plus $250 per disabled child times the number of months of part-time attendance.

• Special Rule for High Income Earners. The higher income spouse may only claim child care expenses during periods in which:
  • The other supporting person was in full or part-time student
  • The other supporting person was incapable of caring for the children because of mental or physical infirmity
  • The other supporting person was confined to a prison or similar institution for at least two weeks
  • You have separated from the other supporting person due to a breakdown in your relationship for a period of at least 90 days but have reconciled within the first 60 days after the taxation year

• Maximum Claim. Lease of:
  • Eligible child care expenses paid to eligible child care providers, two-thirds of earned income and the following limits
    • $4,000 for each child aged 7 – 16 for which the disability amount cannot be claimed plus
    • $7,000 for each child under 7 for which the disability amount cannot be claimed plus
    • $10,000 for each disabled child

• Restrictions to Child Tax Benefit, Disability Amounts. The Child Tax Benefit includes a supplement for each child under 7. This supplement is reduced by 25% of the child care expenses claimed by yourself, your spouse, or your common law partner. If you are claiming the disability amount to a dependant who is under 18, your claim includes a supplement. Reduce this by any child care expenses in excess of a threshold.

• Eligible Expenditures. The following expenses may be claimed: baby sitting costs, day care costs, costs of a live-in nanny, lodging paid at boarding schools, day camps, day sports camps and overnight camps to a maximum of
  • $100 per week for each child age 7 – 16 for which the disability amount cannot be claimed, plus
  • $175 per week per child under 7 for which the disability amount cannot be claimed, plus
  • $250 per week for each disabled child

• Ineligible Expenditures. Medical or hospital care, clothing, transportation, tuition fees for a regular program or sports study program, or for recreational or leisure activities. Any child care expense that is reimbursed (example by the employer) cannot be claimed.