TSG (Tax Specialist Group) - Child Care Expenses (Child Care Expenses)

The Income Tax Act allows an individual to claim a deduction for child care expenses if the individual or a supporting person of the child is employed, carrying on a business; carrying out research and receiving a grant, or attending secondary school or educational institution in a full‑time or part time program.

Normally, child care expenses are deductible by the spouse with the lower net income and the amount that may be deducted is limited to the lesser of two-thirds of earned income and

a maximum of $10,000 per year for each child who is eligible for the disability tax credit for the year;
a maximum of $7,000 per year for each other eligible child who is under 7 years of age at the end of the year,
a maximum of $4,000 per year for each other eligible child who is under 17 years of age at the end of the year.

Child care expenses can include payments made to any person resident in Canada other than a parent of the child, a related person under age 18 or a person for which a parent has claimed a deduction as a dependent.

The Canada Revenue Agency confirmed in a recent Technical Interpretation that amounts paid to grandparents could qualify as long as the expenses incurred were in respect of an eligible child and the grandparent was not being claimed as a dependent by the individual’s parent.

In the right circumstances, paying a grandparent for child care services can reduce the overall family tax burden. For example, a grandparent over the age of 65 and resident in Ontario with $12,000 of existing income would be subject to additional tax of approximately $700 on childcare payments of $8,000. As long as the amount paid is reasonable for the services provided, the parent paying the amount could save up to $3,800 from the tax deduction. Of course, the $3,100 reduction in the family tax burden must be compared to the effect the additional income might have on the grandparent’s eligibility for the Guaranteed Income Supplement, Old Age Security payments and other income tested benefits.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.