Articles August 2005

Once a blessed birth occurs, most couples juggle three child care options: one parent stays at home; both parents work and the child goes to daycare; or both parents work and the child is left in the care of a nanny. But before we get to the options, let’s review the deductions.

If your child qualifies as disabled, the deductible amount is up to $10,000. Otherwise, the deductible amount is up to $7,000 annually or $583 per month for children under 7 years of age and up to $4,000 annually or $333 per month for all other children. Subject to a couple of limitations, the expense must have been incurred to enable the taxpayer to carry on employment, business, occupational training, grant-funded research, or attend school under certain specific conditions.

Currently, courts take a conservative position in interpreting the meaning of the phrase “ child care expense” as found in the Income Tax Act. To be considered a deductible childcare expense, the primary purpose of the expense must be caring for or watching over child so that parent can earn income or go to school. So, in a recent case where the court found that the child care component was incidental to the true purpose of a children’s sports program, the cost of the program was not deductible.

I do not read the provisions of the Act as conservatively as the courts, but I am not in charge - yet. The big problem with the case law in the area is that the appellants are almost all self-represented. The cost of hiring a lawyer for this kind of dispute is prohibitive. Without representation, the Crown is better able to control evidence in order to eliminate expenses that might otherwise be considered deductible. For example, whether childcare is an incidental component of a sport program is difficult to answer from objective evidence. The question that is often asked is, “would you enrol your child in the program even if you were not working?” If the answer is yes, then typically the expense will be denied.

Here are three rules of thumb: the CRA dislikes sports programs; if you would enrol your child in a program even if you didn’t have to work the cost of the program may not qualify for deduction; if you really want to claim the expense, child care should not be an incidental consideration when enrolling your child in a program.

Getting back to childcare options, the easiest, from a tax perspective, is for one parent to stay home. Childcare expenses are deducted from the lowest parental income. If one parent has no income, or is staying at home, the costs of childcare are not deductible, unless the stay at home parent has medical certification that they are unable to provide childcare.

The second option is almost as easy; placing a child in a daycare program is deductible up to a certain cost for the program. The problem here is that employers withhold tax without taking into account childcare expenses. So, employees are being over taxed during the year and getting a refund when they file their tax returns. Employees who find it difficult to make ends meet because of the combination of tax and childcare expenses can apply to the CRA for a reduction in tax withheld by the employer. Take note, this does not mean that less tax will be charged.

The third, or nanny option, is much trickier. The expense is deductible, just like in the second option. However, there is good chance that the person paying the nanny will be considered to be an employer by the CRA. This changes the whole relationship from the government’s perspective.

If you are paying a nanny to care for your child, you must withhold amounts for income tax, pay employment insurance premiums, consider employment standards legislation and minimum wages. If you are providing room and board to the nanny - the value of those benefits should be added to the nanny’s taxable income. Let’s see, minimum wages of $8.00 per hour X 8 hrs a day X 22 days a month = $1408.00, plus room and board. The Employment Standards Act limits the charge for room and board for domestic help to $325 per month. Yikes, expenses over $1,700 per month, way more than the $583 allowable for a child under age 7.

This third option can be restructured so that room and board form part of an hourly wage. Regardless, a nanny will have a base cost of around $1,400 per month, which is about three times the allowable deduction for a child under 7. A better option is to share a nanny with other families. This changes the dynamic of the workplace. Now the nanny appears to be working for him or herself rather than for an employer. Also, the nanny can negotiate a living wage, while the child care expense will be split more effectively assuming the families share child care costs.

Finally, remember that a $7,000 deduction does not mean that that you have $7,000 in your jeans. Expenses only reduce income. For a person earning $32,000 per year, childcare expenses of $7,000 will result in about $1,500 in tax savings. That person will be taxed as though they are earning $25,000 per year. Because of increasing graduated tax rates, a person earning $64,000 per year saves about $2,100 annually and a person earning over $104,000 per year saves about $3,000 annually.

Disclaimer. The author takes no responsibility for those who found this article erotic, but does recommend that those readers who did consider a career in accounting.

-- J. Andre Rachert

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