Why 2017 may prove to be a taxing year if you've got kids
If you’ve got kids, 2017 might prove to be a more taxing year. For starters, last year saw the elimination of the Family Tax Cut, a version of income splitting that allowed an individual to notionally transfer up to $50,000 of income to his or her lower-income spouse or partner, provided they have a child who was under 18 at the end of the year.
The credit, capped at $2,000 annually, was introduced by the Harper government for the 2014 tax year and was cancelled by the Liberals after the 2015 tax year, concluding that “income splitting delivers no benefits to working parents who earn similar salaries, no benefits to single parents and no benefits to Canadians who do not have kids.”
Last year’s budget also eliminated two popular federal credits for children’s activities. For the 2016 calendar year, the non-refundable children’s arts credit was based on up to $250 of qualifying expenses and the refundable children’s fitness tax credit was based on up to $500 of qualifying expenses. Both credits are now gone for 2017.
So, what’s left in the way of tax breaks for parents with kids under 18?
Perhaps the most valuable deduction remaining for many working parents continues to be the child care expense deduction. Under the Income Tax Act, you can deduct child-care expenses you paid to have someone look after your child(ren) so that you or your spouse or partner could earn employment or business income.
The amount you can deduct annually is $8,000 for each child age six and under and $5,000 for each child between seven and 16. If the child is eligible for the disability tax credit, you can deduct $11,000 regardless of the child’s age. The total childcare expense deduction is generally limited to two-thirds of the lower-income spouse or partner’s “earned income,” which includes employment or self-employment income, taxable bursaries or fellowships and research grants.
If you plan to claim child care expenses in 2017, be sure to keep all your receipts. This lesson was reinforced by a recently-decided tax case, where a lack of evidence became problematic for a taxpayer in her attempt to claim child care expenses.
The taxpayer, who was separated from her husband, claimed child care expenses of $9,900 and $12,000 on her 2005 and 2006 tax returns for her three kids, aged 2, 8 and 10 years old. The taxpayer worked full time and the children lived with her. As the judge said, the taxpayer, “must have used some form of child care in 2005 and 2006. The question remains whether she paid for that child care.”
The taxpayer testified that she hired a neighbour, who lived in the building across the street, to look after her children. The neighbour didn’t testify as she had moved back to Ghana about six years previously and had since passed away.
Other than her own testimony and that of her husband, the taxpayer had no evidence supporting the existence of her agreement with the sitter. They did not have a written contract and she paid the sitter in cash, yet she didn’t provide any copies of her bank statements showing the withdrawal of that cash. The Judge found this odd as the amounts that she paid the sitter “were large and represented approximately one-third of her income so I would have expected her to be able to at least attempt to trace those amounts through her bank statements.”
In response, the taxpayer testified that she had had receipts at one time but that she had given those receipts to her tax preparer and no longer had access to them. The taxpayer did not call any witnesses who might have been able to confirm that the sitter had looked after the children.
The judge felt that the taxpayer’s explanation of her payment arrangement with the sitter “did not ring true. It sounded like a poorly thought through explanation that (she) had developed after the fact to justify the amounts she had claimed in her returns.”
For example, to explain the $9,900 amount claimed in 2005 the taxpayer testified that she had paid the sitter $40 per day, which was $200 per week, which was $800 per month, which was $9,600 per year. She then explained that she paid an additional $25 per month to cover times when she ran late. To explain the $12,000 claimed in 2006, the taxpayer said that she had paid the sitter $50 per day, which was $250 per week, which was $1,000 per month, which was $12,000 per year.
As the judge said, “Neither of these supposed systems of payment makes mathematical sense. Both systems assume that there are four weeks in each month when, in fact, there are more than four weeks in all months other than February. (She) did not explain how (the sitter) was compensated for the remaining work days in those months…. She made no mention of statutory holidays or of what happened when she did not have to go to work.”
The taxpayer “should not have had to make up an explanation if she had actually paid (the sitter) the amounts that she claims to have paid her. The truth should have been enough. Her apparently fabricated explanation is enough to convince me that the reason she does not have documents and witnesses to support her story is that those documents do not exist and those witnesses would not have supported her.”
As a result, the Judge ruled that the taxpayer was not entitled to deduct child care expenses in either 2005 or 2006.