If your kids attend summer camp or you spend money on a caregiver to enable you to work, you may be able to get a tax deduction on your return for the cost of child-care expenses. Under our tax rules, you can generally deduct money you paid to caregivers providing child-care services, day nursery schools and daycare centres, as well as fees for child-care services offered through educational institutions, day camps and day sports schools where the primary goal of the camp is to care for children. The deduction is limited to $8,000 annually for a child under the age of seven, $5,000 for other eligible children aged seven to 16 and $11,000 for a child who qualifies for the disability tax credit.
A specific rule requires that where a couple (married or living common-law) incurs deductible child-care expenses, the deduction must generally be claimed by the lower-income partner. But why is this? What if the lower-income partner is neither the actual biological nor adoptive parent of the child? And what if this couple keeps all of their finances separate and the lower-income parent doesn’t actually pay for any of the child’s expenses?
A tax case decided last month raises all of these questions. Audrey Tedford MacIntosh was a single mother of two children: an older daughter, now in her 20s and away at university, and a son who is under the age of ten. She has full custody of her son, who lives with her full-time, in a house that she purchased.
In 2016, Audrey married Jason MacIntosh. Prior to their marriage, the couple entered into a marriage contract “outlining various rights and obligations and acknowledging a desire to remain financially independent of one another.” The agreement covers a variety of topics, including financial responsibilities for the children. The agreement is “crystal clear” that Ms. MacIntosh was to be “solely responsible for the children’s support.”
For the 2016 tax year, Ms. MacIntosh claimed child-care expenses incurred for her son. The Canada Revenue Agency reassessed her return and denied her the child-care expense deduction, saying that since her new husband was the lower-income spouse, she was not entitled to make a claim. Ms. MacIntosh took the matter to Tax Court.
The evidence brought before the court showed that, indeed, Ms. MacIntosh bore all of the expenses associated with the children. This includes all expenses associated with child care and her son’s extracurricular programs. While Mr. MacIntosh enjoys a “happy and healthy relationship” with her son, both parties were clear that she was solely responsible for his care, including taking him to medical appointments and activities and staying home with him if he is sick and unable to attend school.
The judge turned to the Income Tax Act, which states clearly that if the taxpayer (Ms. MacIntosh) is living with a “supporting person,” the lower-income spouse must claim the deduction unless the lower-income parent is in school, prison or is incapable of caring for children because of a disability. None of these exceptions applied in this case.
The Tax Act defines a “supporting person” as a person (other than the taxpayer) who resides with the taxpayer at any time during the year and is either a parent of the child or the taxpayer’s spouse or partner.
In this case, Ms. MacIntosh was the higher-income spouse. Despite this, she argued that because she has sole financial responsibility for her son and her husband has no financial responsibility for him, “she is effectively a single parent to her son and so should be entitled to deduct child-care expenses as if she were a single parent.” In other words, her husband could not possibly be considered a supporting person, at least in the ordinary sense of that term.
The judge, although sympathetic to her argument, denied her claim. She wrote: “Given the arrangements between Mr. and Ms. MacIntosh, I fully understand why she asserts that Mr. MacIntosh should not be considered a supporting person of her son, at least in the financial sense of the term…. Despite the use of the term ‘supporting’, there is no requirement that the person provide any support to the child.”
The decision is in line with the CRA’s published guidelines on child-care expenses, which state that when there is no supporting person for the year, the taxpayer claiming child-care expenses must be the person who paid the expenses; however, where there is both a taxpayer and a supporting person for the year, it doesn’t matter which spouse actually paid the expenses. In this case, it was Mr. MacIntosh who was entitled to claim the child expenses to reduce his income, even though he did not pay any of them. This seems bizarre.
“The tax law was written with a traditional family in mind,” says Dr. Elisabeth Gugl, an associate professor of economics at the University of Victoria whose main research focus is on family economics, a field exploring issues such as family formation and dissolution, investments in children, and gender inequality in relationships. One of the recurring themes in her research is the analysis of how family members make decisions and how public policy may influence their actions and ultimately the distribution of welfare among family members.
Dr. Gugl’s view is that the current tax policy behind the child-care deduction is based on two parents of a child that live together and work together towards the common family good. When it comes to making the decision whether to provide child care in-house or purchase it, she says that one should think of a situation “where it always pays off for the higher earning spouse to work and then the secondary earner thinks about working more and paying for child care or working less and taking care of the child themselves.” In her view, the tax law, therefore, is written with the idea that the person who has the lower income gets to deduct the child-care expenses.
In an interview, Ms. MacIntosh expressed her disappointment with the judge’s decision, saying: “Basically, it’s cost me more than $200 a month to be married. It discourages family units…. The law has to change.”