Once kids age out of daycare, parents need to remember that other child-care deductions are available.FatCamera/iStockPhoto / Getty Images
Daycare is a top deduction for parents filing their income taxes, but many don’t consider other writeoffs eligible under the child-care umbrella, potentially leaving money on the table.
Parents can claim child-care expenses up to $8,000 a year per child under 7 years of age. For older children up to the age of 16, parents can claim up to $5,000 a year per child. (The amount increases to $11,000 for dependent children of all ages who receive the disability tax credit.) With few exceptions, the lower-earning spouse must claim the child-care expenses.
Shannon Tatlock, certified financial planner (CFP) at Red Sky Financial in Moncton, says some parents only claim daycare expenses as the amount they pay year-round easily tops out the maximum deduction limit. But once kids age out of daycare, parents need to broaden the list of deductions.
“If [the child care] allows you to go to work and earn a living or pursue an education, those expenses can be put into the child-care expense pool,” Ms. Tatlock says.
She notes that summer camps are eligible, while boarding schools and private schools are allowed to claim a portion of their school days as child care.
Babysitting is another eligible expense, she adds, but the babysitter must be over the age of 18 for the parent to deduct the expense.
Michelle Connolly, head of financial planning and insurance solutions at Raymond James Ltd. in Toronto, says parents who rely on family members for child care should consider paying grandparents or other family members. While many gladly provide the service for free, she says it’s worth discussing potential tax savings with an accountant.
“What would be the tax liability generated by a grandmother on $8,000 received versus the value of the $8,000 deduction on the parent’s tax return?” Ms. Connolly asks. “The parent paying for the child care is often in a higher marginal tax rate than the grandmother taking care of the child, so it’s generating tax savings.”
For parents who hire a nanny, the employer portion of the Canada Pension Plan and employment insurance is also a deduction that can be put into the child-care expense pool, she adds.
Receipts are a must
In case of an audit from the Canada Revenue Agency, parents need to hold onto their receipts, says Mark McGrath, CFP and associate portfolio manager at PWL Capital Inc. in Squamish, B.C.
Most child-care providers submit receipts, and parents who used a nanny or babysitter need an invoice, he adds. Parents should also ensure the correct information is on the receipt, including the services rendered (and for how long), the business name, and the provider’s business number or social insurance number.
Ms. Connolly notes that child-care receipts, such as those for camps and after-school care, tend to be sent out in February; if parents haven’t received them, they should contact the provider.
Payment by credit card is also a form of receipt, but the parent needs to document the details about the camp and keep them on file, she says.
Deduction limit
But even parents who have all the receipts can’t necessarily claim all their child-care expenses. That’s because expenses can’t exceed two-thirds of the lower-earning spouse’s income, Mr. McGrath says.
“If you were claiming multiple kids, this could be an issue,” he says.
Incorporated business owners and professionals also need to be mindful of their compensation when claiming child-care expenses. For example, Ms. Connolly notes that dividends aren’t earned income. That means a business owner who’s the lower-earning spouse and has no other sources of income beyond dividends won’t qualify for the child-care deduction.
“They could not claim any child-care expenses for tax purposes because they are reporting zero earned income,” she says.
Parents who are shareholders should take this into account when planning how they compensate themselves, she says, and “salary should be considered in part to claim eligible child-care expenses.”