In difficult times when a company faces losses, the owner-manager may decide to forego remuneration and live on the income of his or her spouse. However, if the couple has dependent children under the age of 16, this decision will affect the couple's eligibility to deduct the child care expenses paid for that year.

The deduction for child care expenses for 2003 amounts to $7,000 for children who are under the age of seven at the end of the year and $4,000 for other children between the ages of 7 and 16. Children who qualify for the disability tax credit (and have a completed T2201 Disability Tax Credit Certificate) and are not yet 17 qualify for a deduction up to $10,000.  The deduction is further limited to the maximum deduction prescribed or to two-thirds of your earned income which is generally salary, wages or business income.

When the couple files their income tax returns, generally the spouse with the lower net income is the one entitled to deduct the child care expenses. However, the owner manager who did not receive a salary during that tough year will have to report a nil income, or at least no earned income, and the child care deduction cannot be claimed. For a couple in this situation, the owner manager should consider receiving sufficient remuneration from the company so that the child care expense deduction can be utilized to reduce income taxes.

Assume that the couple has two children ages 4 and 10 and their receipts for child care expenses that year total $12,000. The maximum child care expense that can be claimed for the 2002 taxation year is $11,000 (7,000 + 4,000). With one parent reporting a nil income, the $11,000 child care expense deduction is lost. On the other hand, if the parent operating the company received a salary of $12,000, a number of benefits accrue:

The company can expense the $12,000 salary and reduce the taxes on future earnings by utilizing the corporate losses for that year. At a marginal corporate rate of approximately 20%, the company should see an advantage of approximately $2,400.

The parents now have the advantage of utilizing the $11,000 child care expense deduction which the lower income parent can claim on the tax return. The taxpayer with the $12,000 salary will not pay any personal tax as the $11,000 deduction will result in a net income of $1,000. In fact, that spouse would be eligible for a non-refundable spousal credit on the other spouse's income tax return.

Talk to Logan Katz LLP now to ensure that you and your spouse have structured remuneration so that you will not lose the child care expense deduction for 2003.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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