Summer is officially over. Your vacation time has been exhausted. And the kids are back in school. If you’re a parent who pays for child care that enables you to work, you may be entitled to some tax relief when you file your 2018 tax return.
Under our tax rules, you can generally deduct money you paid to caregivers providing child care services, day nursery schools and daycare centres, as well as fees for child care services offered through educational institutions, day camps and day sports schools where the primary goal of the camp is to care for children.
You can claim up to $8,000 annually for children under the age of seven, $5,000 for other eligible children aged seven to 16, and $11,000 for children who qualify for the disability tax credit.
A recent tax case, decided earlier this month, comes just in time for the school year as it seems to open the door as to what types of child care expenses may be deducted. The case involved a Vancouver banker who was denied his claim for just over $5,000 of child care expenses on his 2016 tax return.
The banker, whose kids were 12 and 10 at the time, typically worked Monday to Friday from 9 a.m. to 5:30 p.m., while his spouse, a mortgage broker, worked similar office hours but also worked some evenings and weekends, depending on client demand. Both children attended school on a full-time basis and were finished around 3 p.m. daily.
The taxpayer paid for his children to be involved in various activities after school throughout the year, including: chess programs, math tutoring classes, Chinese language classes, ski class and summer camp. The couple also hired two high school students and two bilingual university students to pick them up from various classes or mind them during the year. The taxpayer and his spouse “are a modern busy working couple who have chosen a plethora of activities and care arrangements for their children to cover the after school hours before the finish of their work day.”
The taxpayer took the position that all of the expenses he incurred for the above activities and services were to enable he and his wife to work, as without these expenses, one of them would not be able to work. The Canada Revenue Agency, on the other hand, was of the view that the activities the taxpayer paid for were activities that do not qualify for “child care expenses” within the meaning of the Income Tax Act.
Over the decades, there have been two lines of cases dealing with child-care expenses that are fundamentally at odds with respect to the interpretation of what constitutes a properly deductible child care expense.
One line of cases — the one adopted by the CRA — stands for the proposition that recreational or education activities “were not intended by Parliament to be activities to fall within the realm of child care services.” As a judge in one of those cases wrote, “I do not think that recreational expenses … are child care expenses…. These expenses were not incurred for the purposes of watching over children to protect them…. They were incurred to develop the physical, social and artistic abilities of the children. These expenses would have been incurred whether or not the parents had been working.”
The second, alternate line of cases — and the one favoured by the taxpayer — stands for the proposition that the court ought to look at the purpose for which the expense was incurred and not deny a bona fide child-care expense solely because the activity is recreational or educational in nature.
The judge in the recent case preferred this second line of cases, arguing that if the purpose of the legislation is to assist parents who work by subsidizing child-care expenses in the form of a tax deduction, then an expense shouldn’t be denied simply because it includes an “educative element.”
Since both parents worked full-time Monday to Friday, the judge was prepared to conclude that enrolment of the taxpayer’s children in Chinese classes after school hours “was for the purpose of enabling them to work.” The judge concluded the same for the chess, golf and other similar classes in which the children were enrolled. The judge also felt that hiring the two high school students to pick up the children from classes and mind them “clearly falls within the most basic definition of child care.”
The CRA questioned whether it was really necessary to hire the two bilingual university students, who charged $5 more per hour “if opportunity exists for incurring lower costs.” The judge disagreed, quoting a prior case which found that “(the) taxpayer is responsible for choosing … the child care services he or she wishes to use; the taxpayer makes this choice on the basis of the child’s needs, and this choice is an exercise of parental discretion.” As the judge wrote, “It is not for the state to decide who minds the (taxpayer’s) children as long as the expenses claimed are reasonable.”
The CRA also suggested that since one of the banker’s children turned 12 in 2016, “there may not have been need for some of these expenditures.” Again, the judge disagreed, reminding the CRA that “Parliament grants child-care expenses for eligible children up to the age of 16. A parent alone has the right to decide when a child 12 or older should stay home alone.”
The judge therefore allowed most of couple’s $5,000 of child-care expenses, other than $35 paid for their son to attend a chess tournament on a Saturday as there was no evidence the taxpayer had to work Saturdays. Similarly, $260 paid to enroll the children in the “Whistler Ride Tribe program,” which consisted of skiing all day Fridays when they could have been in school, was disallowed as it “does not appear to have facilitated the parents to work and appears to be for a primarily recreational purpose.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.