Understanding the tax implications of affordable care
Here's the problem: Child care costs will go down if you pay less to your child care provider. As a result, your taxes will likely increase, depending on your income level. Deducting childcare costs will also increase your income for the tax department. This is the figure that your refundable tax credits, such as the Canada Child Benefit (CCB), are based on. These important monthly benefits, therefore, may decrease.
To fully understand this, look at your tax return from last year. Child care expenses used as a deduction are found on line 21400 after the calculation on form T778. Total income is on line 23600. That important line is used to “check income” to the government for the amount of provisions on the return, including refundable tax credits such as Canada Child Benefit, Canada Worker's Benefit and the GST/HST Credit. It will also determine how much OAS (Old Age Security) they will receive, or whether employment insurance (EI) benefits will be reinstated. Equally important, refundable tax credits, such as spousal value, may be affected.
If your gross income increases because of your lower child care costs, these benefits decrease, unfortunately.
Invest to reduce net income
There is good news for smart investors, however. To keep your family income low despite reduced child care costs, make an RRSP (registered retirement savings plan) contribution. The resulting RRSP tax deduction reduces your gross income and taxable income and, at the same time, serves to increase your assessed and refundable tax credits! Check how much RRSP room you have on your assessment notice from the Canada Revenue Agency (CRA) to make a contribution.
A similar effect occurs if you claim a deduction for contributions made to a first home savings account (FHSA). An annual deduction of up to $8,000 may be claimed.
Increase your child support claim
The last way to add tax benefits to your childcare costs is to make sure you claim them all and make the most of your tax return.
The cost of childcare is often overlooked by parents. If this has happened to you, did you know that you can go back and amend previously filed returns to make that claim and get the benefits of the tax credit and tax refunds you missed? Especially if you are a first-time filer, be warned, however, that a child support claim is complex and often scrutinized. Be prepared to provide receipts to substantiate your claim.
It is also important to know that the lower-income spouse is the one who must claim child care expenses, except in certain defined situations: when the low-income spouse is unable to care for the children due to mental or physical disabilities, he is in the hospital. full attendance at a suitable school, or hospital or detention for at least two weeks, for example. Another exception is when there is a breakdown of the marital relationship for at least 90 days, but reconciliation takes place within the first 60 days of the year. The usual maximum amounts of $5,000, $8,000 or $11,000 claimed by the highest earner may be reduced, however, by the maximum weekly figure.
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