20 February 2012 External T.I. 2011-0405961E5 - Child Care Expenses - Joint Custody

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: In a joint custody situation, who can claim the child care expenses?

Position: Each parent would be entitled to claim for the child care expenses incurred by the parent when the child resided with that parent, providing all of the conditions of section 63 are met.

Reasons: Paragraph 63(1)(a)

XXXXXXXXXX 							2011-040596
								Ananthy Mahendran
February 20, 2012

Dear XXXXXXXXXX :

Re: Joint Custody and Child Care Expenses

We are writing in response to your correspondence dated May 10, 2011, wherein you requested clarification on parents' entitlement to claim child care expenses pursuant to subsection 63(1) of the Income Tax Act (the Act).

The scenario you described is the following:

• You are separated from your husband since XXXXXXXXXX .
• You and your husband have joint custody of your XXXXXXXXXX children who reside with you 2/3 of the time and with your husband 1/3 of the time.
• You and your husband pay child support proportionally by income. Your husband pays approximately 52% and you pay 48%.

Specifically, you would like to know:

1. Who can claim the child care expenses and in what amounts?
2. Is the interpretation provided under paragraph 18 of IT-495R3, "Separation and shared custody", still the same if there is a "joint custody" situation instead of a "shared custody" situation.
3. If the interpretation is the same, can you claim 2/3 of the total child care expenses paid by both parents?

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. It is our understanding that you have reviewed this bulletin which explains certain expressions, such as "supporting person", "eligible child", and "child care expense", used in section 63 of the Act.

Since each parent resides with the child where there is joint custody and assuming that neither is residing with a "supporting person" during the year, it is our view that each parent would be entitled to claim the amounts he or she paid in respect of child care expenses incurred in a taxation year for an "eligible child", as defined in subsection 63(3) of the Act, if inter alia, the expenses were incurred at the time the parent resided with the child and only to the extent that they were paid by that parent to enable the parent to engage in the activities listed in paragraph (a) of the definition of "child care expense" in subsection 63(3) of the Act (see also paragraph 1 of IT-495R2).

The requirement that the parent reside with the child at the time the expenses are incurred is specifically provided for in paragraph (a) of the definition of "child care expense". In our view, the words "resided with" require that the child be physically resident with the parent (i.e. in the parent's custody) at the time that such parent incurs the child care expenses. Accordingly, the percentage of child care expenses which you may be entitled to claim should generally correspond with the time that your children resided with you, provided you in fact paid this amount and the other requirements of section 63 of the Act have been met.

Pursuant to subsection 63(1) of the Act, the maximum yearly deduction is the lesser of 2/3 of the taxpayer's earned income for the year and the "annual child care expense amount", which is defined in subsection 63(3) of the Act. It is defined as $7,000 for a child under age seven, $4,000 for a child age seven to sixteen and $10,000 for a child that is eligible for the disability tax credit.

You have also asked whether the interpretation provided in paragraph 18 of IT-495R3, "Separation and shared custody", is still the same if there is a "joint custody" situation instead of a "shared custody" situation. Section 63 of the Act does not refer to any specific type of custody situation for purposes of claiming a child care expense deduction under subsection 63(1) of the Act. Accordingly, it is our view that the interpretation provided in paragraph 18 would also be applicable to a joint custody situation.

With respect to your third question, a deduction for child care expenses can only be claimed by a taxpayer if all of the conditions of section 63 are 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 receipts for the child care expenses should be issued by the daycare to the payer of the fees. If each parent pays the daycare, then each parent should be issued a receipt for the amount paid by that parent. If only one parent pays the daycare, the daycare should issue a receipt for the full amount to that parent who in turn should issue a receipt for the amount that the other parent reimbursed in order for the other parent to substantiate his or her claim for child care expenses.

For additional information with respect to the computation of your allowable deduction, please refer to Form T778, Child Care Expenses Deduction for 2010, and the information sheet attached to the form, which are available on the CRA website at http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-10e.pdf. The information sheet provides that if you and your spouse were, due to a breakdown in your relationship, living separate and apart at the end of the taxation year, the child care expenses can be claimed, in part, by both the person with the higher net income and the person with the lower net income. In any such situation, the person with the higher net income must calculate the claim first.

We trust that our comments will be of assistance.

Yours truly,

Sharmini Ratnasingham
Assistant Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch