# considering hiring a nanny, but can we afford it???



## plaza (Sep 16, 2010)

We are in our early to mid 30s and expecting our 5th child this summer and have been considering hiring a nanny since our 3rd. With the 5th now, we finally think it would be the time to get one, but due to the recent economy my business has slowed down quite a bit. I am now making only about 50-60k/yr from rental income. We have no credit ard debt, cars are paid off, mortgage on main house is paid off. We do have a mortgage on one of the rental properties. We also have a good amount in savings at the bank.

We figure the nanny will cost us 1600/month, but wondering how much she will really cost us after tax savings. We probably wll use he services for 3-5 years. After reading many financial books and learning on compounding, we always think about how much this nanny will end up costing us in 30 years from now 

Anyone have a nanny and care to share their views? Can we really afford to have one with an income of 60k if i decided to take some time off or took a while to build up some clients again?


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## marco_salinas (Aug 15, 2012)

I'm sure you can... if still you are in doubt, just seek advice to your friends who have already hired a nanny. If you really like there is a possibility that you can afford.


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## Rainey (Mar 18, 2012)

Five kids? My god, we had the same debate with only two! 
If even three of them are in care then I think the economics are pretty simple -- way cheaper to have a nanny. But I suspect that your situation may be a little more complicated, here's my take on actual costs:

- $1600 is rock bottom cost for full time care, minimum wage in Ontario is over $10/hr. Q: do you want to cheap out on the care of your kids? We ended up finding a nany with a child the same age as our youngest. She brings him along and is fine with minimum wage as she avoids care costs of her own.
- additional costs average to about 200+ a month and administration through CRA is straightforward -- I pay business taxes through online banking.
- on this, it pays to do everything above board -- the nanny gets CPP and EI protection and you get a big fat tax deduction (up to 7k a kid), everybody wins.

Factored into costs also has to be the flexibility. Daycare is cheaper but the dropping off and picking up eats into your day. My wife and I have reasonably predictable hours but on the days we don't its not a big deal. It's also cost effective when the kids get sick, we don't have to take a day off. 

Finally, however hard to quantify, quality of life has to be included. My wife took close to seven years off when we had our first and to go from that lifestyle to the panic that is two kids in daycare would have been overwhelming. A nanny has actually made her transition very easy to take and takes a lot of the pressure out of the day for both of us. 

In all, it means a reasonably peaceful household -- what's the price of that?


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## Plugging Along (Jan 3, 2011)

We have a nanny, and for us from a lifestyle stand point it's worth it.

However, you said you only have rental income. You can only write off the child care against the lowest income earners EMPLOYMENT income. If you do not have employment income, then there will be no tax benefit to you. You are allowed to write off $7k per child under 7 and $3k if the children are over 7, I don't know when the latter stops, to a total of 2/3 of your employment income. 

In terms of costs, you will go have to look at what the live in caregiver wages are. I have to ask do you have room for la live in with five kids. Live out nannies are much more expensive. 

If you are comparing costs of paid daycare/day home vs nanny, it's definately cheaper for the nanny after two kids for full time. If its less than full time, or you are getting reduced child care it's different.

If you provide more info I am happy to answer. I have had nannies right from the start and have helped many friends go through the process.


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## MoneyGal (Apr 24, 2009)

It's $7K deduction per kid from ages 0-7, and then $4K per kid from 7-11. But, like PA said, the deduction must be taken from the employment income of the lower-income-earning spouse. If there is no employment income, there is no deduction. If only one spouse is working, except in very specific circumstances, there is no deduction.


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## plaza (Sep 16, 2010)

Thanks for the replies! Right now my wife is employed by my company. She makes a salary still while I take dividends. Obviously if business continues to be slow, we will have to stop the salary since we will have no income to justify it. Now she will be taking maternity leave this summer and I would like to take paternity (not sure I can with only dividends or rental income), but that's a whole other topic 

Our plan was for my wife to stay home since we homeschool our kids (in canada there is no tax credit for homeschooled kids that I know of), but if she will have to work a few days a week to take deductions, then we will have to rethink this. Are you still entitled to tax deductions when one of us is on maternity?

We do have an extra room for the nanny and we were leaning more towards live in. We are in Quebec so daycare costs are much cheaper than the rest of canada, but it's not an option for us. We don't want to have them in daycare. We want the nanny to be more of a housekeeper and do food prep and spend some time with the youngest while the others are homeschooled. To be honest we can live fine with the 50-60k income we have right now. We can probably even be ok with less since we have paid doff our house and cars. The disadvantage is that the higher we make, the less we get from the governments as child benefits, so that is another factor to consider.

We don't have any friends with nannies, so this is why I came here for help  Are all of you with nannies earning well over 100k/year combined? Are both of you working full time?


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## Rainey (Mar 18, 2012)

Sounds like you have a unique situation. These forums can sometimes give you some good tips but certainly not the place for customized expertise. I wonder if paying your business accountant for a few hours of advice wouldn't be worth it. 

We're in a different boat entirely -- two incomes, both over 100K, public school, mortgage.


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## MoneyGal (Apr 24, 2009)

The issue is not that your wife must continue to draw salary. The issue w/r/t the tax-deductibility of child care expenses is that they must be deducted from the earned income of the lower income-earning spouse. In the situation you have outlined, you have no earned income (dividends are not a form of earned income; they are investment income), so you are the lower income-earning spouse, therefore there is no deduction available. 

See this interpretation bulletin from the CRA for more detail: http://www.cra-arc.gc.ca/E/pub/tp/it495r3/it495r3-e.pdf

So if you would like to calculate whether a nanny is affordable for you, you should be using the full before-tax cost, as there is no tax deduction available in your case. 

If you wanted to change your form of compensation so that you draw salary instead of only dividends to create earned income, keep in mind that both you and your spouse would need to be drawing salary, as the deduction continues to be available only against the earned income of the lower-income-earning spouse.


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## plaza (Sep 16, 2010)

Yes I understand....I would have to draw a salary instead of dividends which is fine. So just to clarify, rental income would not be elligible as it's investment income?


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## MoneyGal (Apr 24, 2009)

Rental income can be considered earned income in most circumstances. 

To reiterate, though, both of you must have earned income, and the deduction must be taken off the lower-income-earning spouse's earned income. 

Your accountant should run scenarios for you.


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## MoneyGal (Apr 24, 2009)

Editing to say that everywhere I wrote "employment income," I should have written "earned income." I'm confused by the OP's situation. I assumed the rental income was being earned in the corp and paid out in the form of dividends - I now realize this may not be the case.


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## plaza (Sep 16, 2010)

I spoke to my accountant about it last week, but he did not seem to be to sure of things. He is a great corp accountant, but might be time to find a new one now that our situations have changed.

Right now, the rental units are in my name. I have been debating if it would be wise to move the three properties into a corp and declare a salary for my wife and I from those incomes. Our goal was to buy more properties. The way it is now, in my name, If my income would go up to 75-100k and I am fine living on 50k, I would pay the higher tax rate on the full amount. 

The way things are right now, units being in my name, would we not be able to do an income split between my wife and I? would she be able to take 25k of the rents and I take 35k for example?

Sorry for going off topic and maybe confusing people, but I have gotten more info here in a day I have in a week from my accountant and searching online.


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## Homerhomer (Oct 18, 2010)

You could roll over personal assets into corporation without triggering immediate capital gains and have shares issued in return.

Will it make sense, depends.
First off you would need to set up another corporation (for liability reasons it would be better to have it seperate from your regular business), which in turn means additional accounting and legal fees.


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## MoneyGal (Apr 24, 2009)

Well, this is financial planning, not really accounting. Most accountants don't do financial planning work. 

You can pay your wife a salary from your rental earnings even if the units are not in her name. Then you would take the child care deduction off the lower of your and her incomes (presuming your rental income can be considered earned income). 

When you say "better," what do you mean? It's hard to know what the right choice unless we know your goals.


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## Homerhomer (Oct 18, 2010)

As far as I can follow OP owns a corporation, wife draws salary and OP draws dividends. The simplest solution would seem for both to draw salary.


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## MoneyGal (Apr 24, 2009)

But there's separate rental income, and it sounds like the corp is not producing much income right now. 

Moving from dividends to salary will mean OP must pay CCP contributions; this will wipe out some of the tax savings of deducting child care.


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## Homerhomer (Oct 18, 2010)

Yes, I am not clear exactly what's going on.

Rental income is personal and I don't think it could be considered earned for the purpose of deducting child care expenses in this situation, hence it would seem like any other changes made would offset some of the savings from claiming child care.


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## plaza (Sep 16, 2010)

Sorry for over complicating things. The way it stands now, I have a corp that was used for an IT consulting business which does not have much stead income anymore and not sure how long it will take to re-start. It pays a salary to my wife and a dividend to me now. I own rental properties which generate 65k gross. Right now that income is declared in my personal name. So the options are:

1. To declare both my wife and I a salary from the current corp. On top of that I have the rental income. I don't need that high of an income and would put me in a higher tax bracket but would allow me to deduct the nanny. Child and Family Benefits will be lowered considerably.
2. Start a new corp, roll over the rental properties to it, and then each take the minimum salary we need to live comfortably. This will allow us to take advantage of nanny expenses while keeping Child and Family Benefits high.
3. Leave things the way they are with the rental income and give 1/2 to my wife so we each split the income. Disadvantage I see here is that if we acquire any new properties, then we are also going into higher tax brackets and losing benefits.

Do these options make sense and if so, am I misunderstanding any of it? Any one make much more sense then the rest?


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## MoneyGal (Apr 24, 2009)

Rental income = earned income in most circumstances. It's in the CRA interpretation bulletin I linked above. 

From IT bulletin IT343R:

"Earned Income" (Paragraph 63(3)(b)) 

13. For purposes of calculating the child care expense deductions, the "earned 
income" of an individual, as defined in paragraph 63(3)(b), must be taken into 
account. This definition includes "his incomes from all businesses carried on 
either alone or as a partner actively engaged in the business" but does not 
include income from property. Thus, rental income can be included in the 
calculation of "earned income" only where it constitutes income from a 
business that is carried on either as a sole proprietorship or, in the case of 
a partnership, by a partner actively engaged in the business. For purposes of 
this paragraph and 12 above, to be considered "actively engaged in the 
business" of a partnership, a partner would normally be expected to contribute 
time, labour and attention to that business to a sufficient extent that such 
contributions would be a determinant in the successful operation of the 
business. +++


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## MoneyGal (Apr 24, 2009)

plaza said:


> Sorry for over complicating things. The way it stands now, I have a corp that was used for an IT consulting business which does not have much stead income anymore and not sure how long it will take to re-start. It pays a salary to my wife and a dividend to me now. I own rental properties which generate 65k gross. Right now that income is declared in my personal name. So the options are:
> 
> 1. To declare both my wife and I a salary from the current corp. On top of that I have the rental income. I don't need that high of an income and would put me in a higher tax bracket but would allow me to deduct the nanny. Child and Family Benefits will be lowered considerably.
> 2. Start a new corp, roll over the rental properties to it, and then each take the minimum salary we need to live comfortably. This will allow us to take advantage of nanny expenses while keeping Child and Family Benefits high.
> ...


There are tax consequences to each of these options and I think you are focussing unduly on the tax brackets issue. 

For example, in option 2, if you keep salary draws to a minimum, you will have passive investment income in the corp, which will be taxed at the highest bracket. Plus you will have a new expense for you, CPP premiums. Ultimately it may NOT be tax effective for you to follow this path, if you main goal is minimizing tax paid. 

In your option 3, you cannot "give 1/2 to your wife." You can pay her a reasonable salary for work she actually performs. One-half will not pass a CRA audit if the properties are not in her name. 

You need someone who will work through these scenarios with you - an actual financial planner who has family and corporate tax expertise.


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## Homerhomer (Oct 18, 2010)

MoneyGal said:


> Rental income = earned income in most circumstances. It's in the CRA interpretation bulletin I linked above.
> 
> From IT bulletin IT343R:
> 
> ...


I understand what earned income is, in this case I don't think you can make a assumption that this is earned income unless there are further details provided.

http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P195_12960

_Do you have rental income or business income?

To determine whether your rental income is from property or from business, consider the number and kinds of services you provide for your tenants.

*In most cases, you are earning income from property if you rent space and provide basic services only. Basic services include heat, light, parking, and laundry facilities.* If you provide additional services to tenants, such as cleaning, security, and meals, you may be carrying on a business. The more services you provide, the greater the chance that your rental operation is a business.

For more information about how to determine if your rental income is income from property or income from business, see Interpretation Bulletin IT-434, Rental of Real Property by Individual, and its Special Release._


In my experience most individuals renting out one to few properties do not provide additional services allowing it to be classifed as business income.


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## MoneyGal (Apr 24, 2009)

Yes, which is why I put "in most circumstances" every time I wrote about whether rental income = earned income! 

This is a relatively complex situation, involving many factors and assumptions. However, a competent accountant/planner will be able to run the numbers fairly quickly.


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## plaza (Sep 16, 2010)

I guess I have to start looking for a financial planner. Right now I have rental income not business income as described above. By rolling over to a corp, will that be considered business income where i can give salaries or passive/investment income still?


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## MoneyGal (Apr 24, 2009)

The issue is that funds left in the corp (as passive investments) are taxed at the highest rate, so there is no advantage to leaving them in the corp (and an actual disadvantage to doing so). You can avoid the highest rate by paying out the earnings as salary or dividends, but you will attract taxation on the salary (and lower your child tax benefits, as well as paying payroll taxes), and if you stick to dividends only, will not create earned income for child care expense deductions. 

Complex!


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## Homerhomer (Oct 18, 2010)

lol, I bet you didn't think hiring a nanny was so complicated ;-)


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## Charlie (May 20, 2011)

You should crunch the numbers with an accountant. If you're looking at the tax rules, the accountant is better at this than the financial planner. A good 'check' is to dummy up scenarios on a tax preparation program.

A couple of things:

Rental income is rarely considered earned income for child care purposes. It is income for RRSP limits (don't know why) but not for childcare. I double checked with my tax program and the rental income line does not forward to the child care earned income calculation. Rental income is generally considered income from property unless you're doing a whole lot more than renting and maintaining space.

The spouse with the lower net income claims childcare. This test includes investment income. The type of income earned by the higher earning spouse does not matter...it only matters that the lower income spouse has earned income.

There's no advantage to transferring your rental to the corp. I don't think you can do the tax free rollover with real estate -- but I'm not sure on that -- but I cannot see an advantage in any case.

You could pay your spouse a reasonable fee for managing the properties. That fee would be earned income to her. It would have to be reasonable based on what you might pay a property manager or maintenance people.

With volatile income and properties potentially subject to unexpected vacancies or R&M, my advice would be to budget without the tax benefit. Since you have all those kids!!!!! you should be able to deduct your full childcare subject to 2/3 of the lower income spouse's earned income. 

There are lots of moving parts, so I find it easiest to plug in scenarios to a tax program rather than trying to juggle all those kittens. 

The other thing to consider is the child tax benefits which should be significant in your case. Declaring more income to claim childcare will claw down your child tax benefits. Dividends will also claw them down since the reduction is based on the 'grossed up dividend' net income amount. So salary to you may be cheaper -- even after the CPP contributions. Too many moving parts. You really have to plug numbers into a tax program to assess how it impacts you.


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## plaza (Sep 16, 2010)

No I never expected this to be so complicated! I will definitely try to get my hands on a tax program to do the simulation.

A Quick question on parental leave...would i be entitled to it if I only receive dividends? If I see that starting to take a salary again for myself is the best thing, would I be entitled to parental if we know we are already expecting a baby?


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## MoneyGal (Apr 24, 2009)

(In my defense I meant "financial planner" in the true sense...I could have said "certified financial planner," I suppose. I don't mean investment salesperson.)

You are entitled to EI-funded parental leave (I'm not sure what other parental leave you would be thinking about) only if you have paid into the EI program as a self-employed person meeting various conditions. I don't know the rules on this as well as other programs but I believe you must have been registered for a minimum of 12 months prior to taking any funded leave. http://www.servicecanada.gc.ca/eng/sc/ei/sew/eligibility.shtml


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## Charlie (May 20, 2011)

You can only take paid parental leave if you paid into EI. So no.


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