A September 11, 2018 Tax Court of Canada case examined the eligibility of a number of child care costs with a recreational and educational component. The taxpayer and his spouse worked full time and had two children, aged 10 and 12.
The Court acknowledged two separate lines of cases related to eligibility of child care expenses (all informal and, therefore, not binding on CRA).
The first set, argues that the definition of a “child care expense” is restrictive such that recreational or educational activities do not qualify. The reasoning is that expenses to develop the physical, social and artistic abilities of the child would have been incurred whether or not the parents had been working.
The second line of cases requires that one evaluate whether the purpose of the expense was to allow the parent(s) to work. A bona fide expense would not be denied solely because the activity was recreational or educational in nature.
The Court accepted the second set of cases as guidance, noting that if Parliament had intended to limit such activities, it would have said so in more specific and restrictive language. As such, the Court accepted the majority of the taxpayer’s child care expenses that contained a recreational and educational component.
The Court found that the taxpayer’s decision to engage university students, who were paid $5/hour more than what was paid to high school students, was irrelevant as “it is not for the state to decide who minds the appellant’s children as long as the expenses are reasonable.” In other words, it is the parents that are responsible for choosing who they wish to use, and they do so, based on the child’s needs; this choice is an exercise of parental discretion.
The Minister also suggested that the child who was 12 years of age in the year may not have needed some of these expenditures due to his age, to which the Court responded that Parliament grants child care expenses for eligible children up to age 16 – it is up to the parent to decide whether a child 12 or older should stay home alone.
Costs related to activities on a Saturday, and during school hours, were denied as they did not facilitate the taxpayers’ ability to work. Amounts related to camp were limited to a weekly amount of $125 (as the child was over 7), as specifically provided for in the Income Tax Act. Camp costs for children under 7 are limited to a weekly amount of $200. A higher amount may be available for those with a disability.
As this case was informal, it is not precedential. While it may provide a filing position, CRA may still challenge these types of child care expenses. CRA’s webpage continues to state that fees for leisure or recreational activities, and fees related to education costs, cannot be claimed as a child care expense.
If incurring child care costs with a recreational or educational component, consideration may be given to claiming these amounts as a child care expense, up to the maximum allowed amount. That is, an annual amount of $8,000/child under 7, $5,000/child aged 7 to 16 and $11,000 for a disabled child.
So what this means… If you (the tax payer) incurs childcare costs for the sole purpose to earn income, then the expense can be claimed. However, if you incur childcare costs outside of the purpose to earn income, then you cannot claim it as an expense on your taxes. If there are recreation or education components to the childcare costs, then you may be able to claim the full amount. The above court case did not change CRA’s standpoint on childcare costs in relation to including recreational and educational components, but it did open the door to allow them on a case by case basis.
If you are unsure of whether an expense can be claimed on your taxes, give us a shout. We would love to sit down and take a look at some tax planning options for you which may include childcare costs.