With the school year just around the corner, it’s a good time to assess your child care expenses and how the tax implications will affect you.

Child care expenses can be substantial deductions: $7,000 per year for each child under the age of 7, $4,000 annually for each child between the ages of 7 and 16 and up to $10,000 per year for any child that is disabled. To be eligible for the disability deduction the child will have to have a severe enough disability to qualify for the disability tax credit.

Unlike some other deductions, child care expenses cannot be carried over and have to be claimed the year they were incurred. And though the deductions are fairly substantial, not everyone can claim them. In a two-income family, the parent with the lower income can claim the deduction as long as it doesn’t exceed two-thirds of his or her income. In a two-parent family where one parent stays home, they are not going to be able to claim a deduction for child care expenses as the Canada Revenue Agency sees one parent was home to provide that child care. The exceptions are when the spouse is attending an educational institution or is physically or mentally unable to look after that child.

When calculating your child care cumulative limits, make sure you report all the children under 16 whether or not you incurred any child care expenses for them. If you go over the maximum for one child, CRA will allow the deduction as long as you haven’t exceeded your cumulative maximum. The CRA allows this because they don’t currently attribute the expenses to any one child and don’t require receipts. Just make sure you keep your receipts in case you are ever audited.

One of the grey areas, though, is what constitutes a child care expense and that will be determined by several factors. A week-long hockey school which is very intense would be considered more of an educational- or sports-oriented activity than, say, a day camp which would have some sports as ancillary activities. The day camp would more likely qualify for the child care deduction while the hockey camp would probably be eligible for the fitness tax credit discussed in last week’s article.

August 27, 2008