Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2021: part 10

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The Child Care Expense Deduction: A Profile of Beneficiaries^{Footnote 1}

1. Introduction

Introduced in 1972, the Child Care Expense Deduction (CCED) is a federal tax relief measure provided to individuals who incur child care expenses in the course of earning employment or business income, pursuing education or performing research. Since its introduction, the measure has gone through a number of changes, including increases in the maximum amounts allowed and age limits.

The CCED promotes horizontal equity by recognizing that an individual who incurs child care expenses would have a reduced ability to pay tax relative to an individual with similar income who would not incur such expenses. The CCED also seeks to reduce barriers to labour force participation for secondary income earners within a family by ensuring neutrality in the tax system between the decision to work or to stay at home to care for a child. This objective is supported through the design of the measure, which stipulates that the lower-income spouse in a couple, who would typically be the one faced with such a decision, must claim the deduction. Although existing empirical evidence on the impact of child care on labour supply is mixed, due to methodological and data limitations, there is a clear consensus that reducing the cost of child care has the potential to increase labour market participation.

The purpose of this study is to present a detailed descriptive analysis of the CCED and its beneficiaries. It begins with an overview of the CCED and its eligibility criteria, followed by a statistical profile of reported child care expenses. The paper concludes with a discussion of the profile of CCED claimants and beneficiaries.

2. Description of the Child Care Expense Deduction

For eligible individuals, the CCED is a deduction, meaning that eligible child care expenses are subtracted from the claimant’s total income (to determine net income) prior to the application of federal and provincial tax rates. Therefore, the CCED also indirectly contributes to determining entitlement to federal and provincial/territorial income-tested programs, which are calculated using net income, such as the Canada Child Benefit, Refundable Medical Expense Supplement, Canada Workers Benefit, and the Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credit, as well as reducing federal and provincial taxes payable.

A claim for the CCED can be made by completing Form T778 and filing a tax return with the Canada Revenue Agency. An individual supporting an “eligible child” (defined below), or another supporting person residing in the household,^{Footnote 2} can claim the CCED for child care expenses paid by either individual. To claim the deduction, parents must have earned employment or business income, carried out research activities, or studied in a full-time or part-time educational program during the tax year.^{Footnote 3}

An “eligible child”, for the purposes of the CCED, is defined as:

• The child of the individual,
• The child of the individual’s spouse or common-law partner, or
• A child who was dependent on the individual or their spouse or common-law partner and earned a net income below the basic personal amount for the year.^{Footnote 4}

All eligible children must have been under the age of 16 at some point in the year. However, the age limit does not apply for any dependent children with an impairment in physical or mental function.

Individuals may claim child care expenses incurred to enable themselves or the supporting person to carry on activities of employment, education, or research. The child care services must include a caregiving component and only the portion of the expenses related to child care may be claimed – these arrangements include caregiving services provided by individuals, babysitting, daycare centres, day camps, day sports schools, boarding schools and educational institutions.^{Footnote 5} Child care services provided by individuals such as the child’s parent or relative are ineligible for the deduction. Residents of Quebec may claim the basic contribution they paid directly to a subsidized child care provider.

The age of each eligible child in the household determines the maximum amount that can be claimed for the CCED. The maximum dollar limits, which are not indexed to inflation, are:

• $8,000 per child under age seven
• $5,000 per child between seven and 16 years of age and infirm dependent children over 16
• $11,000 per child eligible for the Disability Tax Credit (DTC), with no age restrictions

The total annual CCED amount that a taxfiler may claim is the lesser of:^{Footnote 6}

• The total maximum dollar limits for all children
• Two-thirds of earned income for the year^{Footnote 7}
• The actual amount of child care expenses incurred

The dollar limits were put in place to reflect the approximate cost of child care for children in different age groups, while also recognizing that the availability of multiple care options may lead some parents to choose more expensive arrangements with additional components (i.e., enrichment activities, care workers who perform non-care activities). The rationale behind the two-thirds earned income rule was to ensure that child care costs are reasonable relative to an individual’s earnings through work-related activities.

Furthermore, to increase simplicity and reduce the compliance burden on taxfilers, the design of the CCED allows families to pool the dollar limits for all eligible children. For instance, for a family with one child under the age of seven and one child between seven and 16, the total dollar limits would be $13,000, regardless of which children the child care expenses were incurred on behalf of. This feature of the CCED benefits relatively more families with more than one child who could potentially incur child care expenses beyond the individual dollar limits for some children (and less for others) and still deduct the full amount of child care expenses incurred. In contrast, families with one child would be not be able to claim expenses that exceed the limit for the age group to which their child belongs.

In lone parent families, the parent must claim the entire CCED amount. Net income (excluding amounts for child care expenses and social benefits repayment) is used to determine which individual in a dual-earner family can claim the deduction. Generally, the spouse with lower income must claim the CCED (including spouses with zero income). However, the CCED amount could be shared between spouses or claimed solely by the higher-income parent for some situations.^{Footnote 8}

Over the past 25 years, there have been a few changes to the measure. In 1996, the age limit for children for whom child care expenses can be claimed increased from 14 to 16 years. Budget 1998 raised the dollar limits for children under age seven from $5,000 to $7,000 and for children aged seven to 16 from $3,000 to $4,000. In 2000, the dollar limit for children eligible for the DTC increased from $7,000 to $10,000. The last change came in 2015, when the maximum dollar limits increased by a further $1,000 for each group. Since then, there have been no further changes to the CCED’s design.

To summarize, to be eligible to claim the CCED in a given year, an individual taxfiler must meet the following basic eligibility criteria:

• Parent – The individual is the parent of an eligible child.
• Child care expenses – The individual or their spouse/common-law partner incurs child care expenses related to the care of at least one eligible child.
• Relative income – For filers in a dual-filing couple, the individual is the lower-income spouse, unless an exception applies which allows the higher-income spouse to claim the deduction.
• Employment or education – The individual earns employment or business income, studies in a full-time or part-time capacity, or engages in research activities.

3. Statistical Profile

3.1 Profile of Child Care Expenses

This study uses T1 personal income tax return data for the 2018 tax year. Although the design of the measure is tied to some family-based components (i.e., the relative income position of each spouse in a couple), the individual has been chosen as the unit of analysis, since the CCED is claimed at the individual level.

This section analyzes reported child care expenses among the population of taxfilers in Canada and provides statistics on the characteristics of the claimant and beneficiary populations of the CCED. The eligible population is defined as all individuals who, according to the tax data, meet the criteria to claim the CCED, whereas the claimant population is defined as all individuals who claimed the CCED.^{Footnote 9} The beneficiary population includes all filers who claimed the CCED and benefitted from a reduction in federal income tax payable and/or increased entitlement to federal income-tested benefits due to the measure.^{Footnote 10} The profile of beneficiaries is based on the following personal identity factors: gender, age, family type, total family income, and province of residence.

In 2018, 28.4 million Canadians filed a personal income tax return, making up 20.6 million families. Over half of all taxfilers (55.0%) lived in a couple with another filer, while the remainder were sole filers (45.0%).^{Footnote 11} The population of taxfilers most in need of child care are parents who are working and/or studying. As shown in Table 1, 22.5% of all individual filers had eligible children in their family, with women more likely to be parents compared to men (24.7% versus 20.7%).^{Footnote 12} Approximately 8.7% of filers were parents who belonged to families that reported child care expenses – this is likely an underestimate of Canadians who incur child care expenses since filers who report child care expenses are those that expect to benefit from the CCED. This figure reduces to 5.0% after accounting for the relative income of these filers (i.e., lone parents and lower-income spouses), along with the criteria for working or studying.^{Footnote 13},^{Footnote 14}

In 2018, the eligibility rate, defined as the proportion of all taxfilers who were eligible to claim the CCED (i.e., who met the four above-described eligibility criteria), was 5.0%, corresponding to approximately 1,426,200 filers. The higher eligibility rate among women compared to men (7.0% versus 3.2%) can be attributed to the far greater likelihood of women being lone parents or the lower-income spouse in a couple (71.3% versus 28.7%). Among eligible filers, 1,387,600 claimed a CCED amount (97.3%). The high claimant rate is due to the methodological choice of identifying the eligible population based on those who reported child care expenses and thus intended to claim the deduction.^{Footnote 15} Approximately 95.0% of claimants benefitted from the CCED through a reduction in federal taxes payable and/or increased entitlement to federal income-tested benefits, which is equivalent to 1,317,900 beneficiaries.

Table 2 presents statistics on family composition for all filers who had eligible children. In 2018, there were 6,309,700 filers with eligible children. The distribution by age group of children shows that nearly one-third of individuals (31.9%) had children under the age of seven only, whereas 47.9% of filers only had children seven and older. The remaining 20.2% had children in both age groups. Just 4.7% of individuals had a child who was eligible for the DTC. Approximately equal proportions of filers had one child (41.1%) or two children (41.5%), whereas 17.4% had three or more children. Among filers with one child, 42.6% had a child under the age of seven, while 57.4% had a child older than seven.^{Footnote 16}

Table 3 shows statistics on child care spending, among all filers who reported child care expenses by completing Form T778. The distinction has been made between average child care spending per filer and per child; the former refers to overall average spending per taxfiler, whereas the latter figure accounts for the number of children for whom expenses were incurred. In 2018, there were 1,406,900 filers who reported a total of $7.05 billion in out-of-pocket child care expenses. Approximately 70.7% of spending ($4.98 billion) was for children under the age of seven, while 29.3% of spending ($2.06 billion) was for children seven and older.^{Footnote 17} Overall child care spending per filer was $5,010, on average, while median spending per filer was lower at $3,235. Individuals who incurred expenses for children under seven reported $5,810, on average, while average spending per filer for children seven and older was much lower at $2,610.^{Footnote 18}

On a per-child basis, average spending was $2,810 overall. Filers who reported expenses for children under seven only incurred $4,180 per child, on average, compared to an average of $1,800 per child among filers who had children seven and older only. The differences in expenses incurred between the two age groups reflect the greater need for child care for younger children, compared to older children who are typically enrolled in full-time schooling.

It should be noted that child care costs are dependent on a number of factors including the age of the child, type of care arrangement, location, etc., which are not captured by average and median figures. The dollar limits for each category of expenses may also influence reporting behaviour, as taxfilers may choose to under-report child care expenses in accordance with the limits that apply to their situation. In addition, the average expenses claimed per child may not be fully representative of the actual per-child costs incurred by families. Since the design of the CCED allows families with multiple children to pool the dollar limits across all eligible children, it allows a family incurring higher costs than the dollar limit for one child to receive greater recognition of their costs if their expenses for another child are below their corresponding per-child limit.

Due to the design of Form T778, it is not possible to isolate child care expenses incurred in respect of children eligible for the DTC. However, 3.8% of filers (54,100 individuals) with a DTC-eligible child in the household claimed child care expenses totaling $234.1 million (3.3% of total reported expenditures among all filers), compared to the 1,352,800 filers who did not have any DTC-eligible children and claimed $6.81 billion in expenses. Average spending on child care per filer is lower among individuals with a DTC-eligible child ($4,330 versus $5,035), along with average spending per child ($2,020 versus $2,850). One reason for this finding could be that the majority of individuals who had a DTC-eligible child in their family reported zero child care expenses. In 2018, just 1.0% of the entire population of Canadian taxfilers had a DTC-eligible child (295,700 individuals), and 81.7% of these individuals did not report any child care expenses.^{Footnote 19}

As shown in Table 4, Quebec and Ontario account for the largest share of child care spending among the provinces and territories (67.2%), reporting $1.98 billion and $2.75 billion respectively. Across the country, the share of spending for children under the age of seven is greater than the share for children seven and older, ranging from 85.2% in the territories to 65.0% in New Brunswick. The areas with the greatest average spending per filer were Ontario ($6,235), Alberta ($5,930), and the territories ($5,845). In contrast, the lowest spending per filer was found in Prince Edward Island ($4,350), Quebec ($3,705), and Manitoba ($3,590).

Table 4
Annual reported child care spending by province ($), 2018

	Total reported child care expenses ($ millions)	Expenses for children <7 (%)	Expenses for children 7+ (%)	Average spending per filer ($)	Median spending per filer ($)
Newfoundland and Labrador	70.4	69.7	30.3	5,370	4,195
Prince Edward Island	24.3	74.6	25.4	4,350	3,405
Nova Scotia	151.4	66.9	33.1	4,720	3,540
New Brunswick	138.2	65.0	35.0	4,950	4,000
Quebec	1,983.1	71.8	28.2	3,705	2,265
Ontario	2,752.5	68.1	31.9	6,235	4,365
Manitoba	170.7	72.6	27.4	3,590	2,480
Saskatchewan	171.8	78.7	21.3	4,965	3,950
Alberta	833.4	74.4	25.6	5,930	3,970
British Columbia	719.7	72.8	27.2	5,790	3,970
Territories	19.7	85.2	14.8	5,845	4,420
CANADA	7,035.2	70.7	29.3	5,010	3,235
Notes: All values include child care expenses incurred for DTC-eligible children, unless otherwise stated. Due to the design of Form T778, it is not possible to isolate the exact child care spending on DTC-eligible children. Filers residing outside of Canada who reported child care expenses have been excluded. All values in the table are in current dollars. Figures on average and median spending are rounded to the nearest 5. Source: 2018 T1 tax returns.

3.2 Profile of Claimants and Beneficiaries

Table 5 presents statistics on CCED claimants and beneficiaries. In 2018, 1,387,600 individuals claimed over $6.01 billion for the deduction (85.3% of total reported child care expenses), for an average of $4,330 per filer. Approximately 22.2% of claimants were sole filers (308,100 individuals), whereas the remaining 77.8% of filers belonged to a dual-filing couple (1,079,400 individuals). Among the latter, the lower-income spouse was solely responsible for 95.9% of the claims, while the higher-income spouse was involved in the remaining 4.1% of claims.^{Footnote 20} It should be noted that only 7,300 claimants were students, the majority of whom (60.1%) were lone parents.^{Footnote 21} As a result of claiming the CCED, there were 1,193,400 individuals who benefitted from a reduction in federal tax payable, with average tax savings of $850 per person. After accounting for the impact on federal income-tested benefits, CCED beneficiaries (1,317,900 individuals) received an average of $1,020 per person in benefits. The total benefits delivered to taxfilers through this measure in 2018 was $1.35 billion. Tables 6 and 7 present further statistics on CCED claimants and beneficiaries.

Gender

Table 1 shows that women had a higher CCED eligibility rate than men (7.0% versus 3.0%), largely due to the fact that they were more likely to be lone parents or the lower-income spouse in a dual-filing couple. As shown in Table 5, since average CCED claims by men ($4,510) were greater than those made by women ($4,260), the average benefits were also higher among men ($1,075 versus $1,000 per filer). However, while women represented 51.5% of Canadian taxfilers in 2018, they made up a significantly higher proportion of CCED beneficiaries (72.2%). Moreover, 70.7% of the total benefits resulting from the CCED accrued to women.

Age Group

As shown in Table 6, total federal benefits were concentrated among filers aged 25 to 44, particularly because they were the most likely to have eligible children. Roughly 81.0% of beneficiaries were 25 to 44 years old, accounting for 86.2% of total federal benefits from the CCED. The average total benefits for filers aged 35 to 44 was $1,115 per filer and total benefits consisted of 23.0% of their total CCED claims.

Family Type

Table 6 presents results based on family type. Both average child care expenses and CCED amounts claimed were greater among filers in a couple compared to sole filers. This is likely because, among CCED claimants, lone parents tended to have fewer children than filers in a couple.^{Footnote 22} The distribution of beneficiaries skewed heavily towards filers in a couple with children (80.4% versus 19.6%), who realized 85.6% of the total benefits. Sole filers benefitted from a reduction in federal tax payable of $565 per filer, on average, compared to a per-filer average of $920 among filers in a couple. However, sole filers benefited more from the impact of income-tested benefits compared to filers in a couple, since the total benefits as share of CCED claims were roughly equal among the two groups.

Total Family Income Group

Table 6 also presents results based on total family income (which is the sum of total personal income for both spouses in a couple). Filers with higher family income are more likely to be in a dual-filer couple in which both spouses work. When considering only the reduction in federal tax payable, filers with family income greater than $150,000 benefitted disproportionately from the CCED, accounting for 51.3% of federal tax savings. One reason for this result is that the value of a deduction increases with income, since higher-income filers face higher marginal tax rates. However, once federal income-tested benefits are also included in the estimates of the impact of the CCED, the total benefits accruing to low-to modest-income filers increase significantly. Federal tax savings as a proportion of CCED claims were 11.8% and 14.5% for beneficiaries with family income ranging from $30,000 to $60,000 and $60,000 to $90,000 respectively. After adding the impact of income-tested benefits, total benefits as a share of CCED claims were 24.2% and 22.5% respectively. In fact, total benefits as a share of CCED claims was highest among filers with family income ranging from $30,000 to $60,000. Overall, filers with family income under $90,000 made up 35.7% of CCED beneficiaries and received 23.9% of total federal benefits, compared to filers with family income over $150,000 who comprised 31.1% of beneficiaries and received 45.1% of total benefits. Total benefits as a share of CCED claims was lowest among filers with family income under $30,000 because these filers were more likely to have insufficient income to benefit from a reduction in federal tax payable, and at this income level, increases in entitlement to income-tested benefits would have a limited impact.

Finally, it should be noted that there may be differences in underlying preferences for child care among taxfilers across the income distribution, which would impact the types of child care sought out by these individuals. These differences would be reflected in reported child care expenses, which would, in turn, impact claims and benefits derived from the CCED.

Province of Residence

Table 7 shows that, outside of the territories, filers from Ontario claimed the highest average CCED amount per filer ($5,220), followed by individuals in Alberta ($4,975), while filers from Quebec claimed the lowest ($3,310). The majority of beneficiaries resided in either Ontario or Quebec (69.0%) – in fact, individuals living in Quebec represented only 23.5% of Canadian taxfilers in 2018, yet they made up 36.7% of CCED beneficiaries. However, filers from Ontario accounted for 39.0% of total benefits, with average benefits of $1,230 per filer.

The inclusion of the impact on federal income-tested benefits had the largest effect in Prince Edward Island. When considering only federal tax savings, the benefits arising from the CCED accounted for 15.8% of total CCED claims. After accounting for federal income-tested benefits, the total impact as a proportion of claims rose to 22.7% – an increase of approximately 6.9 percentage points.

4. Conclusion

This study presents an analysis of the CCED, a tax measure that allows individuals to claim child care expenses incurred in order to earn employment or business income, attend an educational institution, or perform research. By design, the CCED provides support to secondary income earners in families by requiring the lower-income spouse to claim the deduction, thereby promoting labour force participation for these individuals.

The results show that filers who reported child care expenses tended to spend more on child care for children under the age of seven, relative to children aged seven and older. While the average benefits per filer were greater among men, the majority of the total benefits accrued to women. The profile of beneficiaries indicates that the CCED tends to benefit higher-income filers, when considering the measure’s impact on federal tax payable only. Although the benefits from the CCED may appear to increase with income, the combined impact on federal tax payable and entitlement to federal income-tested benefits significantly benefits modest-income filers.

Overall, the federal tax and transfer system plays an important role in supporting parents. The CCED allows taxfilers to claim eligible child care expenses and increases entitlement to income-tested benefits. It complements other children’s measures such as provincial benefits and the federal Canada Child Benefit, while providing significant support to families with respect to the costs of raising children.

References

Canada Revenue Agency (2018). Income Tax Folio S1-F3-C1, Child Care Expense Deduction.

Canada Revenue Agency (2020). T1 Final Statistics, 2018 taxation year.

Feir, D. and J. Thomas (2019). Introduction of Formal Child Care Services in Inuit Communities and Labour Force Outcomes. University of Toronto Press Journals, 45(4), 428-459.

Statistics Canada (2019). Survey on Early Learning and Child Care Arrangements.

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