# Child care expenses paid to relative



## pmccabe

Hi

Recently my mother came to live with us from China to take care of our daughter while my wife and I head back to work. She has recently received her Permanent Resident status as well.

I understand that I can claim up to $7000 for child care expenses paid to a a relative, which in this case it would apply. So my question is, how do I go about doing this? 

Do I need to have my mother in law open a bank account, and deposit any money that I give her ? 
Would she have to file income taxes at all on the money that I give her?
The CRA form here(http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-11e.pdf) asks for my mother in law's Social Insurance number, so I assume they will want to verify that she has claimed this income.

What if I just claim $7000 and do nothing else ? 

Thanks for the info.


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## Sampson

Your mother MUST claim the income, otherwise you are simply claiming a deduction for which you are not eligible.

Result would be taxes owed to the government on deducted income. I suppose if it can be proven that you intentionally tried to deceive through transfers etc, but no claimed income, then you could be fined as well.

Don't do it. If you are going to claim legitimate tax credits that result in lower capital pool for the rest of Canadians, please make sure they are legal.


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## pmccabe

Sampson said:


> Your mother MUST claim the income, otherwise you are simply claiming a deduction for which you are not eligible.
> 
> Result would be taxes owed to the government on deducted income. I suppose if it can be proven that you intentionally tried to deceive through transfers etc, but no claimed income, then you could be fined as well.
> 
> Don't do it. If you are going to claim legitimate tax credits that result in lower capital pool for the rest of Canadians, please make sure they are legal.


I'm sorry, I'm not trying to deceive anybody, however I can see how my post came off as such. I should have asked what steps I need to take to ensure that I can claim the full $7000 tax deduction for child care expenses paid to a relative. 

I understand that my mother in law will need to file income taxes, and claim this amount. No problem there.

Would I also have to provide records of these payments in the form of bank statements, or checks? 
What would she claim this income under ?
Is this treated as an employee relationship, where I would have to pay CPP and EI ?

Thanks again for any advice.


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## Pennypincher

You just have to prove you paid her. So either a bank statement or cheque or possibly even a hand written receipt with her signature would probably work. Obviously she has to claim the income on her tax return. I think it goes under "other income". Something like line 130 if I remember correctly. Just curious... are you actually paying her? and is it exactly $7,000 a year? 

You wouldn't treat her like a nanny or employee where you pay CPP and EI. She would just be paid like a dayhome caregiver or babysitter. You can claim as long as you fullfill the other requirements (like being at work earning an income while she watches your kids).


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## sprocket1200

pay her. with $7,000 she won't pay much tax. she can be self employed and claim deductions too!
Also charge her rent, claim the income and the big deductions!!

its like how they say that money spent locally multiplies, except in this scenario one pay cheque multiplies into multiple deductions!!!


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## SMS

sprocket1200 said:


> pay her. with $7,000 she won't pay much tax. she can be self employed and claim deductions too!
> Also charge her rent, claim the income and the big deductions!!
> 
> its like how they say that money spent locally multiplies, except in this scenario one pay cheque multiplies into multiple deductions!!!



My mother in law takes care of our 3 kids so we can work. We claim child care expenses and she declares the income on her return. Just recently I got a letter from an area of CRA saying that while EI is not required to be paid because of her relationship to us, CPP must be paid. The child care income for tax year 2013 was just 10,000 below her personal exemption. The letter we received suggested we can appeal within 90 days. I have not received a statement from CPP yet. What would you suggest I do in terms of the appeal. Any information will help. Thank you.


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## Davis

Easy there, Sprocket. With $7000 in income, the mother-in-law would pay no tax because of the basic personal amount, which is like an exemption. Since she is paying no tax, deductions are of no value to her, and she can't transfer excess deductions to another taxpayer.

Charging rent to your mother-in-law and claiming deductions would probably not be valid if the rental deductions exceeded the rent being paid. If you are losing money renting to a relative, then you are probably not charging fair market rent. 

Don't expect to get subsidies for this arrangement from the tax system. You're getting individualized child care. Your mother-in-law is getting quality time with the grandchild. It sounds like a great arrangement without trying to turn it into a dubious tax shelter.


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## Guban

Davis said:


> Easy there, Sprocket. With $7000 in income, the mother-in-law would pay no tax because of the basic personal amount, which is like an exemption. Since she is paying no tax, deductions are of no value to her, and she can't transfer excess deductions to another taxpayer.
> 
> Charging rent to your mother-in-law and claiming deductions would probably not be valid if the rental deductions exceeded the rent being paid. If you are losing money renting to a relative, then you are probably not charging fair market rent.


Valid deductions would decrease the amount of CPP payable.

+1 about the rent comment. Non arms length rental need to be at fair market value. Otherwise, every child/relative would be paying rent at just the amount to cover expenses.


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## WiseOwl

This is an area where there seems to have been a significant 'crack-down' in recent years. A lot of Canadians don't understand that if they hire a nanny, they are quite possibly entering in to an employer-employee relationship. At that point you aren't only looking at source deduction costs payable to CRA. You also need to consider whether you must register for and incur additional costs relating to WSIB/WCB and, furthermore, your relationship with your nanny might also be subject to the Employment Standards Act (think: overtime, vacation, etc.). It's definitely a lot more complicated than it seems at first blush.


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## SMS

*Child care provided by Mother in law*

My mother in law takes care of our 3 kids so we can work. We claim child care expenses and she declares the income on her return. Just recently I got a letter from an area of CRA saying that while EI is not required to be paid because of her relationship to us, CPP must be paid. The child care income for tax year 2013 was just 10,000 below her personal exemption. The letter we received suggested we can appeal within 90 days. I have not received a statement from CPP yet. What would you suggest I do in terms of the appeal. Any information will help. Thank you.


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## Charlie

SMS -- what's your basis for appeal? You owe the CPP. Probably WCB too. MIL will get a refund of the self employed CPP she paid on filing.

Be thankful they didn't go after you for failure to file a T4 or question the $7K.

You should probably be filing a T4 for 2014 by the end of the month.


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## Guban

Charlie: Not sure why MIL would get the CPP back.

SMS. I hope that your MIL did file her taxes and declared that income. If she has a spouse that is taxable, her child care income will affect your FILs spousal credit. By filing, she may have also qualified for the working income tax credit. There may be some GST implications too. Lots of other possible results due to the money you paid her. if your family is above the first tax bracket, paying her still means that as a family you are saving taxes. Btw, by paying CPP, she may increase her future CPP payouts, so it is not entirely negative.


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## Charlie

MIL would have paid self employment CPP.

So when her return is amended to include employment income from SMS (and the CPP paid by SMS), her self employ CPP would be reversed. Otherwise she pays twice.


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## Guban

Sorry, I misread SMSs post.
It also didn't specify how the MIL declared the income. Could have put it on line 104, as other income.


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