The deductibility of child care expenses and other child tax credits when there has been a relationship breakdown has always been a minefield.
For example, in the year of separation, the child care deduction can only be taken if the child physically resides with the parent paying the expense.
The expense must have been incurred to allow the parent to participate in activities such as going to work; working from home; fulfilling the terms of a research grant; to attend school where full time attendance requires at least 10 hours per week and part time attendance requires 12 hours per month spent by the student in the program.
While the spouses are living separate and apart at least 60 days after the end of the year and continue to live separate and apart, each spouse must calculate their annual child care expense amount independently for that first separation year.
If each spouse contributes to a joint bank account that is used for the payment of childcare expenses, then the childcare expenses can be split based on the time that each spouse had physical custody of the child.
In subsequent years, only the person with the lower income can deduct the child care expenses. The person with the higher income can only deduct if the person with the lower income attended school, was imprisoned or was certified by a medical physician to have mental or physical infirmity.
In a shared custody situation, one parent may reimburse the other parent for a portion of the child care costs. The first parent would claim the original cost less the reimbursement and the other parent would claim the reimbursed costs.
The child care provider needs to issue a receipt to the first parent for the care provided and the first parent would then issue a receipt to the second parent for the amount reimbursed. If the amount reimbursed is considered to be ‘support’ then it would not be deductible as a child care expense.
For more information, please refer to CRA folio S1-F3-C1 and S1-F3-C3.The annual child care expense amount is limited to $7,000 for each child under 7 years of age and $4,000 for each child over 6 and under 16 years of age, or over 15 if the child has a physical or mental infirmity and dependent on the taxpayer.
In the year of separation, there is also the ability to claim the child tax credit and designate one child as equivalent to spouse and to claim that credit as well.
The ability to claim these credits is unavailable if the person claiming the credit is paying support payments to the other spouse. In that case, the spouse receiving the support payments has the ability to take the tax credits.
However, if each spouse makes payments to each other during the year of separation, then neither spouse can take the credit.