Child Care Expenses: The Federal Deduction and Ontario's CARE Credit

Child care is one of the few large household costs the tax system treats as a deduction rather than a credit, which makes it worth more to a higher earner in principle and, because of a rule most people find counterintuitive, usually less to them in practice. Ontario then layers a refundable credit on top that many families never claim because they assume it comes automatically.

Both parts turn on the same underlying number, so getting the federal calculation right is what unlocks the provincial one.

The rule that surprises everyone: the lower earner claims

The CRA’s position is unambiguous. If you are the person with the lower net income, including zero income, you must claim the child care expenses. It is not an election. The higher earner can claim only where the lower earner was in one of a short list of situations, set out in Parts C and D of Form T778:

• enrolled in an educational program at a secondary school, college, university or other designated institution, lasting at least three consecutive weeks
• incapable of caring for children because of a mental or physical infirmity, confined for at least two weeks to a bed, a wheelchair or a hospital
• incapable for an indefinite period because of a mental or physical infirmity
• confined to a prison or similar institution for at least two weeks
• living separate and apart at the end of the year for at least 90 days because of a relationship breakdown, then reconciled within the first 60 days of the following year

Where one of those applies, the higher earner calculates first and each spouse files a separate T778. If the two net incomes are identical, you agree between you who claims.

The practical effect is that a household with one high earner and one part-time earner gets the deduction at the part-time earner’s marginal rate, not the high earner’s. That is the design, and it is the reason the deduction is worth less than families expect.

The three limits, and which one bites

Three separate ceilings apply, and your claim is the lowest of them: what you actually paid, the annual limit per child, and two-thirds of the earned income of the person making the claim.

The weekly figures are not separate rules. As Folio S1-F3-C1 explains, the periodic amount is one fortieth of the annual amount, and it caps what you can claim for lodging-based care per week of attendance.

The two-thirds rule is the one that quietly destroys claims. A parent with $18,000 of earned income who paid $16,000 for daycare for two children under 7 is capped at $12,000, because two-thirds of $18,000 is $12,000, well below the $16,000 of annual limits. Earned income for this purpose is essentially employment and self-employment income, not investment income, so a household living on dividends or rent has no capacity to claim at all.

What counts, and what does not

Eligible expenses include daycare centres, nursery schools, caregivers, day camps and day sports schools where the primary purpose is caring for children, and boarding schools or overnight camps within the weekly cap. The CRA’s expenses you can claim page is the reference list.

Three exclusions catch people every year:

1. An institution offering a sports study program is not a day sports school. A hockey academy that teaches a curriculum is education, not child care.
2. Payments to the child’s own parent do not qualify, and neither do payments to a related person under 18. Paying a 16 year old sibling to babysit produces nothing.
3. Payments to a person for whom you claimed a dependant amount on lines 30400, 30425, 30450 or 30500 do not qualify. You cannot claim the same person twice.

Reimbursed amounts, and amounts you are entitled to be reimbursed for, are also out. If your employer paid the cost and included it in your income as a taxable benefit, you can claim the part that was included.

Ontario’s CARE credit sits on top

The Ontario Child Care Tax Credit, formally the Childcare Access and Relief from Expenses credit, is refundable, which means it pays out even when you owe no tax. Ontario’s CARE credit page sets it as a percentage of your federal Child Care Expense Deduction, with the percentage falling as family income rises.

A family with $45,500 of income sits in the third band, $5,500 above $40,000, which is two parts of $5,000, so the rate is 59 percent minus 4 points, or 55 percent. Ontario caps the amount receivable at $6,000 per child under 7, $3,750 per child aged 7 to 16, and $8,250 per child with a severe disability.

You claim it on Schedule ON479-A with your return. It is not automatic and it is not applied by the CRA on your behalf, which is the single most common reason an Ontario family with a valid daycare claim leaves money behind.

Working the claim in order

Step 1. Total the receipts, by child.
        Provider name, SIN if an individual, amount.
│
Step 2. Apply the annual limit for each child.
        Age at 31 December decides the band.
│
Step 3. Identify the claimant.
        Lower net income, unless a Part C or D
        situation applies to that person.
│
Step 4. Apply two-thirds of the claimant's earned
        income to the total.
│
Step 5. Enter the result on line 21400 with T778.
│
Step 6. Carry the same figure to Schedule ON479-A
        for the Ontario CARE credit.

Receipts, subsidies and the audit question

The CRA asks for child care receipts more often than for almost any other personal deduction, and the requirement is specific: a receipt from the provider, and where the provider is an individual, their social insurance number. A cancelled cheque or an e-transfer record on its own is not a receipt. The general record retention rules apply, so keep them for six years after the year the claim relates to.

If you receive a municipal fee subsidy, and Ottawa administers one under the provincial child care fee subsidy program, you claim only the portion you actually paid. The subsidised portion is not your expense.

Two adjacent claims are worth checking in the same sitting. A child approved for the Disability Tax Credit moves to the $11,000 limit regardless of age, and camp fees in the summer are frequently missed because parents file them mentally as recreation rather than care. The test is the primary purpose of the program, not what it is called.

If you have a household where one spouse is in school part of the year, or a child who moved into the DTC band mid-year, the claim can be split in ways that are easy to get wrong and worth several hundred dollars. Send me the T778s and the receipts for the last two years and I will tell you whether the right person claimed and whether the Ontario credit was picked up. Get in touch with the returns and the daycare statements.