Individual Tax Series: Child Care Expenses: Maximizing Your Deductions and Understanding Tax Implications
- Rylan Kaliel
- May 12
- 9 min read
Updated: Jun 20
Child care expenses can represent a substantial portion of family budgets, but fortunately, these expenses can often be deducted on your Canadian tax return. Understanding eligibility, what qualifies as a deductible expense, and accurately reporting child care expenses can lead to significant tax savings. This blog post provides comprehensive insights into claiming child care expenses effectively.
What Situations Allow for a Deduction of Child Care Expenses?
Generally speaking, child care expenses may only be claimed provided you are carrying on specific activities. The most common activities that would enable you to claim a deduction would be where you are incurring child care expenses to:
Perform duties required to earn employment income
Carry on a business
Carry on research or similar work to which you are receiving a grant
Attend schooling where you are enrolled in a full-time or part-time educational program
There can be some complexities to the timing of these activities and the time in which you incurred child care expenses, so it is advised you discuss any concerns you may have with an income tax professional.
Who Can Claim Child Care Expenses?
Generally, the parent with the lower net income is required to claim child care expenses. However, there are exceptions, including situations where the lower-income parent is a full-time student, incapacitated, confined to a prison, or separated from their partner.
Claiming Child Care Expenses While Separated?
The higher income parent may be able to claim child care expenses during the year there is a separation. There are two situations to consider here, both of which require that there be a separation, or as worded by the CRA, a breakdown in the marriage or common-law partnership.
Reconciliation Arose Within 60 Days After The End of the Year
In order for the higher income parent to claim the deduction, all of the following must be met:
The higher income parent (taxpayer) and the other parent (supporting person) resided together at some time in the year;
The taxpayer and supporting person were living separate and apart at the end of the year for a period of at least 90 days in the year of the separation; and
The taxpayer and supporting person began to reside together again within 60 days after the end of the year
Generally speaking, for the higher income parent to claim a deduction the child must have resided with the higher income parent and the higher income parent must have incurred these costs during the time the child resided with them. As will be discussed in more detail below, the amount that can be deducted will be in proportion to the time of the separation (i.e., if you were separated for 26 weeks and the child resided with you for this time, the deduction would generally be 50% of what the normal limit would be).
No Reconciliation Arose
In this case, a deduction will only be available to the person that resided with the child and to the extent that this person incurred the expenses. As such, if the higher income parent resided with the child and incurred expenses, these would be deductible. Similarly, this deduction may be limited to the proportion of the time that the child resided with the higher income parent.
In situations involving a separation, whether temporary or permanent, the child care expense deduction should be reviewed by a tax professional. Additionally, some benefits and credits may be dependent on the terms of a separation agreement or other factors, so additional care should be taken to ensure that your return is prepared correctly to ensure there are no issues.
Shared Custody
Where the parents are separated, both parents may claim the child care expenses deduction. In order to claim this deduction, the following must be met:
The expenses were incurred during a period in which the child resided with the person; and
The expenses were incurred to enable this person to carry on activities that would allow for a deduction (see What Situations Allow for a Deduction of Child Care Expenses? above).
Further, in shared custody situations, one parent (incurring parent) may pay for a child care provider and the other parent (reimbursing parent) may reimburse them for a portion of these costs. In these situations, the following steps should take place:
The incurring parent should receive a receipt from the child care provider; and
The reimbursing parent should issue a receipt for the amounts reimbursed to the incurring parent.
In these cases, generally the incurring parent will be entitled to a deduction equal to the net amount paid, that is child care expenses less reimbursements. The second parent will be generally be entitled to a deduction equal to the amount of the reimbursements.
There can be exceptions to this, such as where these amounts were paid as a support payment (i.e., child care support and spousal support). Where the amounts are taxable to the incurring parent, the incurring parent would not reduce the child care expenses for these amounts. Further, the reimbursing parent would not be able to claim a deduction for these amounts as child care (another deduction would generally be available).
While support payments are complex, a general rule is that spousal support would typically be taxable to the incurring parent and deductible (as a support payment, not child care expense) to the reimbursing parent. Child care on the other hand is typically not taxable nor deductible. This said, it is advised that you have any support payments you receive reviewed by an income tax professional prior to making this distinction.
The above comments would be contingent on if either parent marries or enters into a common-law partnership with another person, in which case, the deduction may only be available to the new spouse(s) where the spouse(s) have a lower net income then the parent.
What Qualifies as Child Care Expenses?
Eligible child care expenses include payments made for:
Daycare centers and nursery schools
Daycare services (including home-based providers)
Before and after-school programs
Day camps and summer camps (some limitations may arise)
Educational institutes for the purposes of providing child care services
Caregiver expenses (nannies, babysitters)
To qualify, expenses must have been incurred so one could earn employment income, attend school, carry on a business, or carry out research activities.
Limitations
There may be some limitations to what is deductible, which can be dependent on the provider of the service. For example, summer camps are only deductible provided they provide a “sufficient degree of child care services" as part of the camp, which generally requires they include protection and care.
Take, for example, a situation where two children attend a day summer camp, from 9 AM – 5 PM. The two children are aged 5 and 15. The day summer camp provides basketball training and provides two meals and a snack.
Absent any additional information, we can assume that for the 5-year-old, it is likely that there is a higher degree of child care services, as a 5-year-old would require additional care and support. It would be likely that the 5-year-old would meet this test from a high-level glance and an understanding of where they are developmentally.
In contrast, it may be that a 15-year-old is more self-sufficient, and the camp can focus more on basketball skills and technical training, such that there is not a significant degree of child care services. In this case, it may be that the 15-year-old would not meet these requirements.
In short, what constitutes a “sufficient degree of child care services” is a question of fact and is based on the services provided by the summer camp or similar institution. The situation surrounding the summer camp should be reviewed by a tax professional to ensure deductibility.
An additional limiting factor is that the deduction for the child is limited to a specific amount per week, so if your expenses exceed this amount then it would be reduced. This amount per week is discussed in more detail below.
Limits on Child Care Expenses
For tax purposes, child care expenses are limited to the lessor of three amounts:
The amounts paid for child care expenses
An annual limit determined by child
2/3 of earned income
Amounts Paid for Child Care Expenses
These would be simply the total of all amounts paid for child care expenses. They would require that the amounts paid be eligible child care expenses (see What Qualifies as Child Care Expenses? above for details).
Annual Limit
The Canada Revenue Agency (CRA) imposes annual limits on child care expenses you can claim, based on the age of your children:
Children under 7: up to $8,000 per child annually (or $200 per child per week)
Children aged 7 to 16: Up to $5,000 per child annually (or $125 per child per week)
Children over 15 with a physical or mental infirmity: up to $5,000 per child annually (or $125 per child per week)
Children eligible for the Disability Tax Credit (DTC): Up to $11,000 annually, regardless of age (or $275 per child per week)
These limits apply per child and can significantly impact your deductible amount.
As a note, the weekly rate is applicable for certain situations where the higher income parent can claim a deduction, for separation, or for camp purposes. This deduction is taken as 1/40 of the annual amount, but the total amount for that child cannot exceed the annual limit.
Earned Income
Earned income is a defined term and generally includes:
Income earned from employment, including certain benefits, such as stock options
Income from scholarships, bursaries, prizes, research grants, etc. to the extent they are included into income for tax purposes
Income from businesses
Disability pension received under the Canada Pension Plan or the Quebec Pension Plan
Other specific governmental financial assistance
The limit for a deduction under earned income is 2/3 of this amount.
It is important to note that the earned income is for the person claiming the deduction. As noted above in Who Can Claim Child Care Expenses? the lower income parent is the person who would claim the deduction and thus we would be concerned with their earned income. That said, where some of the exceptions apply this could be another person, such as the higher income parent, so it is important to determine this early in the process.
Example
Let’s walk through an example with the following facts:
Jack and Rita are married with two kids: Chloe and Jacob.
Jack has an earned income of $65,000 and Rita has an earned income of $80,000.
Chloe is aged 5 and Jacob is aged 8, neither have an infirmity nor were entitled to the Disability Tax Credit.
Jack and Rita resided together for the entirety of the year and were at no point separated.
Neither Jack nor Rita attended full-time school, were incapacitated, or were in prison during the year.
Full-time daycare for the two children totalled $18,000.
Based on the facts, we would calculate the child care expenses deduction as follows:
You will note that the child care expense is limited to the least of the three, such that the annual limit is the amount that is actually deductible. Given that our actual expenditures were $18,000, this would leave us with $5,000 that would not be deductible.
How to Claim Child Care Expenses
You claim child care expenses using Form T778 Child Care Expenses Deduction. On this form, you detail:
Name of the child the amounts were paid to
Amounts paid to caregivers or providers
Provider's name, address, and Social Insurance Number (SIN) or business registration number
Where applicable, number of weeks the child attended a boarding school or overnight camp
Keeping thorough records and receipts is essential for CRA verification.
Common Mistakes and How to Avoid Them
Common errors taxpayers make include:
Claiming ineligible expenses (e.g., amounts incurred where specific activities were not undertaken, were reimbursed, etc.)
Failing to keep adequate records or receipts
Incorrectly assigning expenses to the higher-income parent
To avoid these pitfalls:
Carefully review the CRA guidelines for eligible expenses.
Keep detailed documentation throughout the year.
Clarify agreements in situations involving separated or divorced parents.
Strategic Considerations for Maximizing Deductions
To optimize child care deductions:
Utilize child care services strategically, focusing on eligible providers.
Plan annual child care arrangements based on maximum allowable deduction limits.
Coordinate with the other parent/spouse to maximize overall household tax savings.
Impact on Tax Credits
It's important to note that claiming child care expenses reduces the net income used to calculate certain benefits and credits, such as the Canada Child Benefit (CCB) and the GST/HST credit. Accurate reporting can positively influence your entitlement to these benefits.
Summary
Understanding and properly claiming child care expenses can provide substantial tax relief for families. By staying informed about eligibility criteria, deduction limits, and documentation requirements, you can confidently claim these valuable deductions and optimize your family’s tax situation.
Stay tuned for our next blog post, where we'll discuss moving expenses and their impact on your taxes.
KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.
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