8 April 2010 External T.I. 2009-0317671E5 - child care expenses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: A couple legally separate during the year, do not cohabitate with anyone else, split caregiver costs 50/50 and they have 2 children that reside 50% of their time with each parent. 1) Does each parent have to pay the nanny directly or can the father reimburse the mother for 50% of the cost of the nanny and be eligible to claim the child care expense? 2) Assuming that each parent does not have to pay the nanny directly, can each parent claim 50% of the wages and employer's portion of the Canada pension plan contributions and employment insurance premiums from one T4 summary issued by the mother, as child care expense?

Position: 1) The father can reimburse the mother for his share of the child care expenses paid to the nanny by the mother provided that the requirement in subsection 63(1) of the Act is met. 2) Yes, providing all other conditions of section 63 are met.

Reasons: 1) Subsection 63(1) of the Act requires that a claim be substantiated by receipts issued by the payee, that is normally the caregiver. 2) The list of child care services in the definition of "child care expense" under subsection 63(3) is not an exhaustive list.

XXXXXXXXXX 							2009-031767
					 			N. Shea-Farrow
April 8, 2010

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Child Care Expense

We are writing in response to your fax of April 9, 2009 requesting clarification on parents' entitlement to deduct child care expenses pursuant to subsection 63(1) of the Income Tax Act (the "Act"). The scenario you described is the following:

1. A couple legally separates during the tax year, remain single and do not cohabitate with anyone.
2. They have 2 children, ages 8 and 6, and both of them split their time 50/50 at each parent's house.
3. The caregiver is a nanny, who receives a T4 from the mother, and resides at each parent's house 50% of the time.
4. The parents split the caregiver costs 50/50.

You want to know if each parent has to pay the nanny directly or can the father reimburse the mother for 50% of the cost? Additionally, if each parent has to pay the nanny, does that require that each parent have a payroll account and each issue a T4? Finally, you state that assuming that each parent doesn't have to issue a T4 to the nanny, can they split the wages and employer's portion of the Canada pension plan contributions and employment insurance premiums from the one T4 summary 50/50 and each make a claim for their respective amount on the T778, Child Care Expenses Deduction form?

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as set out in Information Circular IC 70-6R5 dated May 17, 2002. Where the particular transactions are completed the inquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments, which may be of assistance.

Our Comments

The Canada Revenue Agency's (CRA) general position on the deductibility of child care expenses under section 63 of the Act is set out in Interpretation Bulletin (IT) 495R3, "Child Care Expenses". A couple that separates during the tax year and does not reconcile within 60 days after the end of the tax year will result in no supporting person for the year of separation. Child care expenses for the year of separation will be allowed only to the parent who resided with an eligible child as defined in subsection 63(3) of the Act and only to the extent that they were paid by the parent to enable that parent to engage in activities listed in paragraph 1 of IT-495R3. The CRA will generally consider each parent to reside with the child while the child is in their custody.

Both parents may claim a deduction for the year of separation with no reduction for the amount claimed by the other parent. However, paragraph 63(1)(d) of the Act does prevent one parent from making a claim for child care expenses for which that parent is entitled to a reimbursement, such as, from the other parent.

When parents are legally separated and the mother pays a nanny and the father reimburses the mother for his share of the child care expenses that is acceptable provided that the requirement in subsection 63(1) of the Act is met. Subsection 63(1) of the Act requires that a claim be substantiated by receipts issued by the payee, and contain the payee's social insurance number if, the payee is an individual. Therefore, the caregiver should issue a receipt for the full amount that was paid by the mother for child care expenses. In addition, the mother should issue a receipt to the father for the amount that the father reimbursed her in order for him to substantiate his claim for child care expenses.

Your second question does not need to be addressed since both parents do not need to pay the nanny directly to claim child care expenses providing they comply with the paragraph above.

Finally, if parents legally separate during the year, do not cohabitate with anyone, split caregiver costs 50/50 and both children reside 50% of their time with each parent, each parent can claim, on the T778 - Child Care Deduction form, half of the wages paid to the caregiver and half of the employer's portion of the Canada pension plan contributions and employment insurance premiums as child care expenses.

We trust that these comments will be of assistance.

Sharmini Ratnasingham
Manager
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch