My wife and I earn similar (but variable) incomes, and so each year we engage in what we call the “Child Care Expense Derby.” We have the government to thank for that. Every year I am a bit suprised by who it goes to (“and the winner is…”), but I am glad for the opportunity to get some tax back for the money we put into child care. I always like to go to some handy tax calculators to figure out where I stand before tax time to see if I can predict the winner. Here are two: my website (not very complicated), and TaxTips.Ca (more complicated).
The reason for the derby is this – we are never exactly sure which income will be the lowest until we get our employers’ T4’s, and then the spouse with the lowest income is the one who receives the benefit of the child care tax deduction. Also, thew winner of the Child Care Expense Derby will be the spouse who contributes less to their RRSP. The child care expenses can cause a big swing: tax rules allow expenses to be deducted in the following amounts:
- a maximum of $7,000 per year for each other eligible child who is under 7 years of age at the end of the year; and
- a maximum of $4,000 per year for each other eligible child (between the ages of 7 and 16).
This means that a family of three children under the age of 7 has deductions of up to $21,000 – nice work. You could notice significant savings on your taxes, approximately a $7,000 tax savings for the average Canadian, who earns income at approximately a 30% tax rate. The eligible child care is defined by CRA as on their website follows:
- an eligible child care provider;
- a day nursery school or day-care centre;
- a day camp or day sports school;
- a boarding school or camp (including a sports school where lodging is involved); and
- an educational institution for the purpose of providing child care services.
Note that this is not an exhaustive list expenses, and other expenses, such as advertising for a care worker, or agency fees to find a care worker are also included.
The downside here is for a family that only has one income, or when the incomes are far apart (i.e. one high income and one low income), the deduction may not be as great that two mid- or high-income earners. But it is still powerful. Imagine a family with one income of $75,000 and one income of $45,000. (Let’s say there are two children under 7, so $14,000 of eligible expenses). The lower income spouse at $45,000 would reduce their taxable income by $14,000, using the childcare expenses as a deduction against income. This would be a tax savings of approximately $3,300 for the year.
You should also note that this deduction gives you the exact same tax relief as an RRSP deduction, so if you have to make the choice between who does what, don’t let the lower income spouse do any RRSP deduction until the higher income spouse has maximized their RRSP contribution. This will ensure that the higher income spouse gets more deductions against their income, and that the lower income spouse does not put RRSP contributions in at an exceedingly low rate. Some planning should help you avoid this.
This should help when it comes to deciding what to do about care for your kids, to help and reconcile the finances at the end of the year, and to generate some other tax benefits while you are at it.