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A beneficial tweak on child care expenses tax credit

'Army Child Care Fee’s increase in the 2011-2012 school year 111024' photo (c) 2001, U.S. Army - license: http://creativecommons.org/licenses/by/2.0/

Have you filed your tax return yet?  If you’re like most, the answer to that question is no.  If you’re one of the many who will be getting things together this weekend, here is a take on a familiar tax credit that you may not be aware of.  If you’ve filed already and want to change something, CRA’s website has instructions on how to change your return.

 

 

Child care expenses in unusual circumstances

The part about child care expenses that you probably already know is that usually the lower income earner must claim the deduction, and can only make the claim if they have “earned income”.  However, there are circumstances in which the higher income earner may be able to claim part or all of the deduction.  These include:

  • the lower-income earner was a student in attendance at a secondary school or a designated educationalinstitution
  • the lower-income earner was not able to care for the children because of a mental or physical infirmity
  • the lower-income earner was confined to a prison for at least 2 weeks, or
  • certain relationship breakdown and reconciliation situations

 

If you think one of these situations may apply to you, please read part C and D of formT778, and paragraph 17 ofIT-495r3.

 

The only voluntary situation listed here is educational enrollment, so let’s look at that.  If you’re the lower-income earner and you’re thinking about upgrading your skills, these provisions can be beneficial.  You might even be able to take a course without being out of pocket any money.  Here’s how this might work, assuming that you have the child care costs already and that you’re not spending extra in this area:

 

If the cost of the course is $360 and lasts for 4 months, the total tax credits will be:

  • tuition credit:  $360
  • education & textbook amounts – 4 months x 140 = $560
  • total of $920 x lowest tax rate amount of about 20% depending on which province you live in =  tax savings of $184

 

Add to this the difference in child care claim.  With a course that is 4 months long, and 2 kids that are fairly young, the higher income earner could claim up to $1,400 of child care expenses.  If that person is in the highest tax bracket, then they save 46% (in Ontario) of the $1,400 instead of 20% that the lower income earner would save if he/she claimed the child care expenses in the lowest bracket.  That means a tax savings equal to the difference in their tax brackets – 46%-20% is 26%.  Multiply $1,400 by 26% and you have incremental tax savings of $364.

 

If we add the tax savings on the child care costs of $364 with the tuition tax credits, the total tax savings amount to $548.  You just got paid $188 to go to school part-time for 4 months.

 

Note:  This math stops working in your favour if the cost of the course climbs to over $600.  It can also vary depending on how long the course is, the tax brackets of both spouses, how many children you have and how old they are.  So, make sure you run your own numbers. 
July 28, 2012

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