Continuing from our discussion last week regarding the merits of claiming child care expenses vs claiming medical expenses, we look at some actual results. It may be too technical for some of you, but please persevere as I will provide some simple solutions. I will use the example of the following fictitious family:
- A higher income spouse
- A lower income spouse
- One child who qualifies for the Disability Tax Credit (DTC)
- $2,000 in medical expenses other than ABA Therapy or child care
- $10,000 in expenses which can be claimed as either child care or medical expenses
The following rules were applied to each scenario:
- Only 2/3 of the lower income could be applied towards child care to a maximum of $10,000 (2014)
- The higher income claimed the DTC
- After reaching the end of each scenario, I used TurboTax to decide who should claim the medical expenses
It is virtually impossible to create a formula or spreadsheet to decide which one to claim because of the huge number of variables. Instead I will list some examples in the table below using TurboTax 2014. The lowest tax owing figure is highlighted in green.
| Higher Income | Lower Income | Combined Income | Tax Owing using child care | Tax owing using medical expenses | Difference |
| $20,000 | $20,000 | $40,000 | -$200 | -$427 | $227 |
| $30,000 | $10,000* | $40,000 | -$717 | -$427 | $290 |
| $40,000 | $10,000* | $50,000 | $342 | $448 | $106 |
| $40,000 | $20,000 | $60,000 | $2,493 | $1,818 | $675 |
| $40,000 | $40,000 | $80,000 | $6,091 | $6,245 | $154 |
| $60,000 | $40,000 | $100,000 | $10,957 | $11,633 | $676 |
| $80,000 | $30,000 | $110,000 | $13,766 | $14,846 | $1,080 |
| $80,000 | $40,000 | $120,000 | $16,852 | $17,707 | $855 |
*Only 2/3 of the lower income could be applied to child care so the remainder was added to medical expenses
Why is it in the first 4 examples, it could be either child care or medical expenses being more advantageous?
- A child care claim may indeed reduce an individual’s net income, but it may lower it to the point that non-refundable tax credits are going to waste as they can’t reduce tax below zero
- A child care claim may lower net family income to the point that the refundable medical expense (one of the few ways to reduce your tax below zero) becomes the greater advantage
- The medical expense claim may be advantageous if tax owing is kept above zero for both persons. The combined federal and provincial credits may reach approximately 20%
In the $80,000/$30,000 example, claiming the $10,000 as child care saves you $3,086. That is a 30.9% tax savings which is well above the marginal tax rate. Why is that?
- I admit that this was a head scratcher for me. It took some digging, but the reason is, lowering the net income of one partner increased the “Family Tax Cut” which is the fake income splitting introduced in 2014.
This is all very technical, but next week I will suggest some easy to follow “Rules of Thumb” that you can use to maximize your tax savings.
Autism Funding in BC 
Hi, Looks like we haven’t been claiming any child care or medical expenses in the previous years. I left everything to my CGA (Accountant). Is there any chance that I could recover my losses in the previous years?
Absolutely! Use the form T1_ADJ (it’s a simple one page form) to make your request to the CRA. Good luck and enjoy the refund.
Probably a dumb question, but are the incomes Gross or Net? Probably Gross….. I’m self employed and the lower income Spouse….. we are going to be claiming ABA/childcare for 2019. We have a similar scenario to the 80,000/30,000 except I’m not sure how self employed income might change that……
Hi. It’s not quite as simple as Gross vs Net. Some tax rules have changed since this was posted. The best thing to do is to run some simulations on a tax program to see how each scenario changes the combined tax picture for your family.