Tax return and childcare costs

[craigcd]

OK, I am going to try to explain this as clear as possible. Feel free to ask questions if I missed something or if I am being unclear.

Currently my mother in-law cares for our kids during the day while we work and we pay her a monthly amount to do so, she doesn't work otherwise and this is her only "income". Essentially the cost covers food, gas and basic costs. My father in-law works.

When we did our taxes this year we input the amount of childcare we paid her and understood that to do so she would have to claim that amount on her return. The amount is well under the limit of $11,000 or whatever.

They are currently completing their 2014 taxes and when they enter the amount into her return under "other income line 104" it is reducing his refund by about $1200 (had they not entered anything), this is joint return.

I am not a tax expert so if you can explain how this works or if there is a better way to claim this amount that would be great. My real issue is that what we pay her basically covers expenses and is not a income, I was surprised to hear it was lowering his/their return.



Thanks in advance

[ExtraSlow]

Higher income means more taxes and thus a lower refund.

If she has expenses, she'll need to become a business and write off those expenses against her earned income.

It would for sure be wrong for her to stop claiming this amount as income and just accept cash from you. Especially if you continues to claim that amount on your taxes as a legitimate childcare expense. Probably get audited. Bad idea.

The tax system is set up for parents to purchase childcare from businesses.

[Masked Bandit]

Unless you're willing to cheat (which I don't think is the case), if you want to claim the expense, she'll have to claim the income. That's pretty much the end of the story. CRA is going to get their pound of flesh from someone. I guess you'll have to see of the credit you receive is higher or lower than the $1200 she'll be losing out on.

We ran into the same thing with our oldest when she was little and I couldn't find away around it.

[JRSC00LUDE]

edit - my thought was incorrect.

[sabad66]

They are filing jointly as a married couple, so that's why it reduces his return. How much of a difference did it make when you entered it in yours? Did it reduce your tax liability by 1200?

If not, maybe it's better if you jsut pay her in cash and don't claim it... that way she won't have to claim it on hers and owe 1200 in taxes. But again depends on how much it reduces your liability.

[craigcd]

Thanks for the information so far, the answer is what I assumed. I will have to take a look back and what difference it made on our return. Next year we may simply not report as the money is for expenses and not really income.

[KappaSigma]

Assuming she has no other income, the issue is probably not taxes. Her personal exemptions would cover 11k. What is happening is that there are certain personal credits that can be shared when married or common law. Now that she has income they could be using it on her instead of him.

[craigcd]

Originally posted by KappaSigma
Assuming she has no other income, the issue is probably not taxes. Her personal exemptions would cover 11k. What is happening is that there are certain personal credits that can be shared when married or common law. Now that she has income they could be using it on her instead of him.

I assume there would be know way to navigate around this?

[DJ_NAV]

FYI, the proper way to claim this income is on T2125. On the T2125 you can also claim applicable expenses.

Also, basically what is happening is that her basic credit has now being used(some or all) by her as she has income. Any unused credits are transferred to the spouse. I hope this makes sense to you.

[suntan]

Just FYI, she's going to have to pay EI on that money.

[craigcd]

Originally posted by DJ_NAV
FYI, the proper way to claim this income is on T2125. On the T2125 you can also claim applicable expenses.

Also, basically what is happening is that her basic credit has now being used(some or all) by her as she has income. Any unused credits are transferred to the spouse. I hope this makes sense to you.

Thanks for the info.

I think the only time the t2125 would be used is if it was a business and we were going to try to recoup as expenses.



Originally posted by suntan

Just FYI, she's going to have to pay EI on that money.

I don't think this is correct.

[suntan]

Well good luck with that. She'll find out soon enough.

[craigcd]

Spoke with CRA and they confirmed

[suntan]

Confirmed what?