Tax Tips on Child Care Expenses

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You may claim child-care expenses to reduce your tax if you or your spouse pays to have someone look after your children so that you can:

  • earn income from employment or self-employment;
  • attend full-time or part-time, in an educational program offered by a secondary school, college, university, or other designated educational institution; or
  • carry on research or similar work for which a grant was received.

The maximum annual deduction available to parents is $7,000 per year for each child under 7 on December 31 and $4,000 per year for each child from the ages of 7 to 16. There is no age limit if you have a disabled child, and you could be able to claim up to $10,000.
In most cases the supporting person (not necessarily the parent) with the lowest net income before the childcare deduction is the only person that may claim the expenses. Interestingly, claiming childcare may be beneficial even if one of the spouses has no tax to pay. Claiming the deduction could increase the spousal/common law amount available (maximum $10,382 in 2010).

Child care expenses are not deductible if paid to the child’s father or mother, or to any person under 18 who is related to you by a blood relationship, marriage, or adoption. This includes your or your spouse’s or common-law partner’s child, brother, sister, brother-in-law, or sister-in-law. Nieces, nephews, aunts, or uncles are not considered related persons for this expense. The expenses have to be for services rendered in 2011. The child has to have been living with you or the other supporting person when you incurred the expense.

Consider paying adult children (18 or older in the year) for any time during 2011 in which they looked after the younger children (16 or younger throughout the year) to allow you to be at work earning an income. You’ll get a deduction and your adult child will face the tax on the payments – although he or she may pay little or no tax depending on his or her other income. Same strategy can be used with grandparents, especially when they have little or no other income (this is often the case with new immigrants to Canada).

Note that you can also pay money to any non-related person who is under 18. It means that you can hire a responsible teenager from neighborhood, and deduct money paid to him/her as your child care expenses. At the same time his/her parents could use babysitting services of your older kid and…well, you got the idea. But this whole thing should be real; otherwise you will be participating in a tax evasion scheme. Which we never advise our clients to do…there are lots of legitimate ways to reduce taxes.