Costs incurred for child care expenses are among the most frequent deductions claimed by Canadian taxpayers on their annual tax returns. And, for many Canadian families, especially those with more than one child, or those who live in large urban centres, the cost of child care can consume a significant percentage of their annual budget.
For all families who incur child care expenses, the good news is that most such costs can be claimed as a deduction (as opposed to a refundable or non-refundable credit) on the annual return, meaning that those costs reduce taxable income on a dollar-for-dollar basis. The tax treatment of expenses related to child care can, however, vary, depending on the kinds of expenses incurred and their purpose.
The basic rule is that child care expenses will be deductible when they are incurred in to order to allow a parent to earn income from either employment or self-employment, or to attend school. However, while those criteria for claiming the expense are broad, there are limitations on the amounts which may be claimed, no matter how large the actual expenditure.
For 2016, those dollar figure limitations are as follows:
- up to $8,000 in child care expenses incurred for a child or children who are 6 years of age or under at the end of 2016; and
- up to $5,000 in child care expenses incurred for a child or children who are between 7 and 16 years of age at the end of 2016.
Where a child is disabled, higher limits apply, and up to $10,000 in child care expenses can be claimed for 2016.
The total amount claimed for child care expenses, regardless of the age of the children or the number of children for whom such claims are made, is also subject to an overall limit of two-thirds of the income for the year of the parent making the claim. As well, in a two-parent family, any claim for child care expenses must generally be made by the spouse with the lower net income.
While amounts paid for day care or after-school care comprise the majority of child care expenses incurred by families, those aren’t the only costs. Where family finances allow, children may attend an overnight summer camp or a sports school, and a portion of the costs incurred for such camps may also be claimed as child care expenses. As is the case with the basic child care expense claim, there are limitations on the amounts which can be claimed and deducted, as follows:
- up to $200 per week in such costs incurred for a child or children who were 6 years of age or under at the end of 2016; and
- up to $125 per week in such costs incurred for a child or children who are between 7 and 16 years of age at the end of 2016.
And, as with the basic child care expense deduction, higher limits apply in the case of a disabled child, for whom up to $275 per week in such costs may be claimed.
There is a third category of expenses which many families incur for children, and those expenses are subject to different tax treatment. That category includes costs incurred to enroll children in extracurricular athletic or arts-focused activities.
While other child care costs are deductible from income, costs incurred for extracurricular activities are eligible for a non-refundable tax credit. Essentially, the federal income tax payable for the year by the parent who claims the credit is reduced by 15% of the amount paid to enroll a child or children in those activities.
Once again, there is a limit on the amount of eligible costs for which a credit can be claimed, and those limits have been reduced for 2016. The 2016 limits are as follows:
- where a child is engaged in athletic or sports activities, a parent can claim a non-refundable credit on up to $500 of costs incurred for such activities;
- where a child is enrolled in arts or cultural-related activities, a parent can claim a non-refundable credit on up to $250 of costs incurred for such activities.
It’s readily apparent that costs which are eligible for either of these credits could also qualify, in the right circumstances, for the child care expense deduction. The rule in such circumstances is that where an amount would qualify for both, such amount must first be claimed as a child care expense, with a tax credit then claimable on any unused remainder.
The number and variety of extracurricular activities available for children is, of course, enormous, and so the Canada Revenue Agency (CRA) has prescribed rules which apply to determine whether a particular activity qualifies for either of these credits. Information on those rules, and on the credit generally, can be found on the CRA website at www.cra-arc.gc.ca/fitness/ and www.cra-arc.gc.ca/artscredit/.
A deduction for child care expenses is claimed on line 214 of the annual tax return, but details of child care expenses incurred, and the computation of the available deduction, is done on Form T778, and that form also includes a useful summary of the applicable rules. The T778 is not included in the General Income Tax Return and Guide Package, but is available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t778/README.html