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  1. #1
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    Default Childcare expenses

    Hello, my question is regarding childcare. We are currently unable to claim any of our child care. The reason being is that DH makes more then me so I need to be the one claiming it. However, I get a T5 as I own a small business and take dividends as opposed to a paycheque. I only take the minimum $28,000 allowed tax free so my understanding is that I do nit receive any tax benefits since I don't pay personal taxes.
    Is there any way around this? I asked my accountant if child care could be an expense I could write off through the business but he told me the only way you could do that is by having a daycare facility offered to my employees (not feesible as there are only 4 employees with young children). However my husbands friend, who used to own a business, said that he wrote off his childcare. Just wondering who is right??

    Thanks in advance, Kara

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    Hi there,

    There is no way around it - you can't claim the childcare unless you have “earned income“ which doesn't include dividend income. You may want to re-think the dividend strategy from your company going forward especially while you have child care. You're better off claiming a wage up to an amount that is then offset by the personal deduction and the childcare expenses. This builds up your CPP credits and RRSP room for retirement (because dividends don't) and it get's you a deduction against your income in the company (because dividends don't). You don't have to pay EI on your wages if you own more than 40% of the company shares.

    Right now you may not be paying personal tax because of the preferential dividend treatment but you're not coming ahead necessarily since you're paying the tax on the earnings in the company instead and losing out on the benefit of the child care cash deduction you've handed over.

    There is no other way to claim the child care - it's a deduction designed to help offset the costs of employment. Your accountant is correct that you can't consider it a business expense where it's your own personal expense. Your hubby's friend did it wrong if he/she was only taking dividend income and didn't have a spouse with employment income - he/she just didn't get caught.

    Hope that helps
    Last edited by strongmommy; 03-11-2011 at 11:21 AM.

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    thank you for your quick reply! The reason I am taking dividends is becuase my corporate tax rate is very low due to the type of business I opperate. (I remember my accountant sayign something about an 'active company'??? there fore I only pay 14 or 16% corporate taxes vs a much higher personal rate.
    That being said, how much could I expect to see back from childcare expenses if I were to go the other route?

    Thanks, Kara

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    Hi again,

    Yes, active business income (profits under $500K in a CCPC) pay the lowest corp rates at 16% for 2010 and about 15% for 2011. Having said that, your $28K in cash is fully paid corp tax dollars and at 16% your company has paid about $4400 in tax on that money already. If it was a wage to you, the company would pay no tax on it and you would pay (assuming say $5000 in daycare) about $2400 in total tax. Since it's all really your money at the end of the day - you can see where you're personal rates at this level of income are much lower than 16% because of the deductions of the basic exemption, the employment exemption and the childcare. Your marginal rate may be 21% but your effective rate (the amount of tax you pay on your gross income after all your deductions) is only around 12%. You'd have to add in the CPP but that adds only a few hundred so you're still ahead if you consider both sides.

    Having said all that, your accountant has the advantage of knowing all your records and I'm just going off what you've posted ... so there might be a reason it still makes sense to use dividends given the other particulars. My only real comment then is that it isn't a blanket statement best way to go always and sometimes what you did last year doesn't make sense this year and will be different still than what you do next year .... which is why it's crazy busy for accountants at the end of February trying to figure out what makes sense for each business in time for the T4/T5 deadline.

    Hope that helps!

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