Daycare and taxes and audits, oh my!!

Hi! Welcome back to me!

After a mostly silent summer, the approach of the autumn season seems to have awakened this Funny Accountant from his slumber. Truth be told, it’s been a busy summer…with work, our new house having been a constant work-in-progress, a preggers wife and a 2.6804-year-old getting used to her big girl bed, little time remains for writing. However, when a subject keeps cropping up on a daily basis, action must be taken! That being said…….I give you:

The Funny Accountant Tells You How Much You’ll Actually be Spending on Daycare in Quebec – Whether You’re in $7/day or More-Than-$7/Day And Also What to Do to Get Cash Back Earlier!

OK, so my title’s not the most eloquent thing in the world but I’m hopeful it gets the job done. I’ll try and make this quick and easy for those whose accounting and tax attention span is smaller than a home daycare:

If your child is enrolled in a $7/day daycare, you don’t get anything back from Quebec. Zip. Zippo. Zip-a-dee-doo-dah. Also, DO NOT try to claim the expenses on your Quebec taxes because you will get audited and you will have to repay the amount you claimed plus interest and a penalty. I’ve seen it many times now. However, on your Canadian tax return, you are allowed claiming the deduction for $7/day.

The situation gets more complicated for those of you out there paying more than $7/day. How much you’ll get back of your expense depends on a couple of things, but mostly depends on your family income. It goes like this:

  1. Add up how much you spent on daycare during the year, not including the $7/day amount if your daycare is partially subsidized! For example, if you’re paying $35/day but $7/day is covered by QC, you can only claim $28/day in expenses for Quebec. For 200 days, that’s $5,600 to claim even though you’re actually out-of-pocket $35/day x 200 days = $7,000.
  2. Now multiply your claim total by 60%. This is how much you’re getting back from Quebec. This is assuming your family income (the pre-tax total of what both spouses earn) is between $47,000 and $94,000. If you earn a bit more as a family, that 60% rate goes lower. If you earn less as a family, the 60% can increase to as high as 75%!

So in our example above, a family claiming $5,600 on daycare for the year will get back $5,600 x 60% = $3,360. Yum.

One more itty bitty thing I should mention. Quebec has designed the system with limits. In general, if you’re enrolled in a daycare for the entire year that charges more than $35/day, you’ve reached the limit and you won’t get any money back on anything spent over $35/day.

For your Canadian taxes though (again from our example above), you can claim that entire $7,000 you’re out-of-pocket (Canada’s system also has a limit which happens to be $7,000 for the first child claimed). This amount for Canada is a deduction from your income, meaning the amount you “get back” is based on your marginal personal tax rate and that’s something neither of us wants to get into in a blog post. The last thing I want is to upset a loyal reader or have you accidentally lapse into a tax coma onto your laptop keyboard.

Just for fun, I made up an imaginary family! The husband (named Rocket) makes $45,000 per year, the wife (named Bertha) earns $49,000. They have one kid (a piano prodigy named Rupert) enrolled in a partially-subsidized, $35/day daycare for the entire year or 260 days. Rocket, Bertha and Rupert also have a guinea pig named Copernicus. (Cut me some slack, boring tax talk requires desperate measures to keep the reader interested!)

Total spent = $9,100

Total claim is $35/day MINUS $7/day = $28/day.

Total money back from Quebec = $28/day x 260 days x 60% =$4,368)

Total money back from Canada (assuming their tax rate is 20% = $7,000 (maximum claim, even though they spent $9,100) x 20% = $1,400.

So the family gets back $4,368 + $1,400 = $5,768 of the $9,100 they spent on daycare. Not too shabby. Plenty of cash now for piano lessons and guinea pig food.

Something else to keep in mind – you can apply to get the Quebec portion of the expenses back throughout the year to help cover the expenses as you have to pay them. The program is called Advance Payments of the Tax Credit for Child Care Expenses (one point to Quebec for creativity) and more info can be found here. If your situation is not as straight forward as the example above, my advice is always the same – use an accountant to prepare your taxes because mistakes will cost you….so chances are the accounting fees will pay for themselves.

Sincerely,

The Funny Accountant

 

Don’t forget to follow me on Twitter if you like what you read!  And as always, if you have tax questions, need advice on your personal taxes, corporate taxes or anything else accounting or business related, please contact The Funny Accountant/President of MK & Associates by phone at (514) 833-1158 or by e-mail at mitch@mkassociates.ca.

Also, for a witty and insightful read, check out the wifey’s blog. It’s funny and good.

2 thoughts on “Daycare and taxes and audits, oh my!!

  1. Hi Funny Acc,
    How does that calculation work if the child is just in subsidized daycare, meaning if they only pay the $7.30/day.
    Is it more worth it/cheaper, or not, to go to a partially subsidized daycare or fully subsidized. Some parents are opting out of subsidized and going to partially subsidized daycare thinking it’s cheaper tax wise…thoughts??

    Like

    1. Hi Demetrios,
      Good question and one I’ve been getting a lot lately from clients in the position to have to decide between subsidized and non-subsidized daycare. The crossover price depends on the family’s income and a couple of other factors such as the type of income earned. For example, for a family earning $60k total income, the breakeven point for non-subsidized daycare (the price at which they’ll be out of pocket the same amount as $7.30/day) is around $24-26/day. For a $100k family, that number increases to around $29. Maybe a blog post on the issue is needed….thoughts?

      Like

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