While the rules of the Canadian tax system include a great number of tax deduction and credit claims which can be made by individuals, the general rule is that personal living expenses do not, in most cases, qualify for any kind of tax assistance or tax relief. However (and fortunately for parents who must expend significant amounts over the course of a tax year for the cost of day care, after-school care, a babysitter, or even a nanny) an exception is provided from that rule in the form of the child care expenses tax deduction.
That child care expenses tax deduction is particularly beneficial in two ways: first, while there are limits on the amount of child care expenses which can be deducted (and those limits are not indexed to inflation and have not changed since 2014), the limits imposed are still relatively generous ones. Second, and more important, the child care expense deduction enables parents to deduct eligible expenses from income on a dollar-for-dollar basis, meaning that income used to pay eligible child care expenses is income which is not taxed. As well, the rule determining whether child care costs incurred are deductible is fairly straightforward and easy to meet – parents who incur eligible child care costs in order to work (whether in employment or self-employment) or, in some cases to attend school, can deduct those costs from income.
The amount of any available child care deduction to be claimed for the 2025 tax year is calculated on Form T778 E(25), and that calculation can seem forbiddingly complex. However, at the end of the day, the amount of child care expenses which can be deducted is simply the least of three figures, and only one of those figures requires a calculation. The steps involved in determining the amount of available child care expenses deduction are as follows.
First, the amount of any deduction for child care expenses is limited to two-thirds of the taxpayer’s earned income for the year. The income figure used to calculate the two-thirds figure is, generally, the amount shown on Line 23600 of the annual tax return. Where the family incurring child care expenses is a two-income family, it is usually the spouse with the lower net income who must make the claim and consequently it is their net income which is used to provide that two-thirds of net income figure.
The second figure to be determined is the amount actually paid for eligible child care costs during the year. While virtually any licensed child care arrangement will qualify for purposes of the deduction, some more informal arrangements may not. Specifically, no deduction is available for amounts paid to most family members to provide child care. Consequently, it’s not possible for a working spouse to pay the stay-at-home parent to provide child care, nor is it possible to pay an older sibling (or any other related person) who is under the age of 18 to provide such services and to claim a deduction for those expenses incurred. As well, where a claim is made for a deduction for child care expenses on the annual return, the claimant must obtain (and be prepared to provide to the tax authorities) the social insurance number of the individual providing the care as well as a receipt showing the amounts paid, whether to an individual or an organization.
The third figure to be determined is the one which requires some calculation. Basically, the rules governing the deduction of child care expenses impose a maximum deduction per child per year (referred to as the “basic limit”), with that basic limit dependent on the age and health of the particular child.
For 2025, the following overall limits apply:
- $5,000 in costs per year for a child who was born in 2009 to 2018;
- $8,000 in costs per year for a child who was born after 2018;
- $11,000 in costs per year for a child who was born in 2025 or earlier and for whom the disability tax credit can be claimed.
Take, for example, a two-income family in which one spouse earns $70,000 and the second spouse earns $56,000. They have two children, aged 4 (born in 2021) and aged 8 (born in 2017). Neither is disabled. The 4-year-old attends day care five days a week and the 8-year-old goes to an after-school program each weekday.
During 2025, the family incurred $6,000 in day care costs for the younger child and $4,000 in costs for after-school care for the older child.
All eligible child care costs incurred must be claimed by the lower income spouse, who earned $56,000 during 2025. In order to determine the amount which can be claimed for each child, it’s necessary to determine the basic limit for that child, based on their age, as follows.
- the basic limit for the 4-year-old (who was born after 2018) is $8,000, and so the entire $6,000 in day care costs incurred can be deducted.
- the basic limit for the 8-year-old (who was born between 2009 and 2018) is $5,000, and so once again the entire $4,000 incurred in costs for after-school can be deducted.
Finally, the overall limit for purposes of the child care expense deduction is two-thirds of earned income of the lower-income spouse, meaning that the maximum claim which can be made for 2025 is $37,296 (66.6% of $56,000), well in excess of the actual costs incurred.
The total deduction available for child care expenses incurred for the 2025 tax year will therefore be $10,000. That deduction is claimed on Line 21400 of the tax return filed by the lower-income spouse for the year, reducing their taxable income from $56,000 to $46,000, and resulting in a federal tax savings of $1,450. A similar tax deduction is claimed as well for provincial tax purposes; the amount of provincial tax saved will depend on the tax rates imposed by the province in which the family lives.
If you would like help with dealing with the CRA or would like to know more about taxable benefits, please feel free to call us at (905) 305-9722 or email us at info@eigenmachtcrackower.com and we will help you out!
