How Dependents Affect Your Taxes.
Dependents can influence your taxes in multiple ways, often reducing the amount of tax owed to CRA. By properly claim your dependents on your tax returns, you can optimize your tax return and leave more money in your pocket. The Canadian government does offer a variety of tax benefits to support families and individuals with dependents.
Who qualifies as a dependent?
Regarding the Canadian tax law, a dependent is typically someone who relies on you for financial support. This means that dependents are not limited to children. They can also include elderly parents, disabled family members, and, in some cases, other relatives or individuals who live with you and are relay on you for your support.
Types of Dependents
Children:
This generally includes any biological or adopted child under the age of 18 who lives with you and relies on you for financial support. This can also include foster children or children you are a legal guardian for.
Furthermore, children over the age of 18 who are full-time students or have certain disabilities can also be considered dependents.
For example: A single parent supporting a 15-year-old son who lives at home and attends high school full-time can claim their son as a dependent.
Elderly:
Providing financial support to your elderly parents or other relatives over the age of 65 who live with you, can be considered dependents. This does include helping with daily living expenses or medical care. These dependents must have a income below a certain threshold to qualify.
Example: An individual who financially supports a 70-year-old mother, who has limited income and lives with them to receive care and assistance can claim their mother as a dependent.
Relatives and Other Dependents:
Other relatives such as siblings, grandparents, or in-laws can be claimed as dependents if they live with you and rely on you for financial support. The same income thresholds that apply to elderly parents typically apply here as well. In special cases, non-relatives who live with you and rely on you for support may also be considered dependents.
A taxpayer supporting a 22-year-old daughter with a disability who requires ongoing financial support for her medical and living expenses can claim their daughter as a dependent.
Criteria for Claiming Dependents
Residency
One of the key factors in dependent eligibility is residency. The dependent must reside in Canada for most of the year and usually must live with you in the same household. Temporary absences regarding school, medical care, or other reasons usually do not disqualify them from being considered your dependent.
Financial Support
Another key factor in determining eligibility as a dependent is the level of financial support they require from you. To qualify, you must provide significant financial support for the dependent’s basic needs, such as housing, food and medical care. The exact amount or proportion of support required can vary depending on the specific tax credit you are claiming.
Documentation
Finally, the dependent may live with you and require substantial financial support from you, but this will not matter if no documentations are in place. Proper documentation, such as receipts for expenses, proof of residence, and evidence of the dependent’s relationship to you, is essential to claiming dependents. This ensures you meet all the criteria and can back up your claims in the event of a tax audit.
Key Tax Benefits for Claiming Dependents
Claiming dependents on your tax return in Canada offers several valuable tax benefits. These credits and deductions can significantly reduce your taxable income and provide crucial financial support for families. Here’s a detailed look at some of the tax benefits available for Canadian with dependents:
Canada Child Benefit (CCB)
The Canada Child Benefit is a tax-free monthly payment made to eligible families to help with the cost of raising children under 18 years old. It’s based on family income and adjusted annually to reflect changes in income and family circumstances. To qualify, you must live with the child, be the primary caregiver, and be a resident of Canada. Both you and the child must have a valid Social Insurance Number (SIN).
While the CCB itself is non-taxable, the amount you receive can impact your eligibility for other benefits and credits.
Some steps you can take to ensure you are getting your entitled amount.
- Ensure that you file a tax return every year, as the CCB amount is based on your income that year.
- Report any changes in family status, such as the birth of a child or a change in custody arrangements, to ensure you receive the correct payment.
Childcare Expense Deduction
The Childcare Expense Deduction allows you to deduct the cost of childcare from your taxable income. Some eligible expenses may include payments for daycare centers, babysitters, boarding schools, and more. The maximum amount you can deduct varies depending on the child’s age and needs. For example, you can claim up to $8,000 per year for each child under 7 and up to $5,000 per year for each child aged 7 to 16. For any children with disabilities, the limit increases to $11,000 .
Eligible Types of Childcare
Qualifying expenses must be incurred to allow you or your spouse to work, attend school, or carry out research for which you received a grant. Furthermore the caregiver should not be a related person, such as an older sibling. The key here is to keep detailed receipts and records of child care payments
Special Situations
When it comes to claiming dependents on your tax return, various types of dependents come with their own unique considerations and benefits. Understanding these nuances is crucial for maximizing your tax savings and ensuring compliance with Canadian tax laws.
Single Parent Families
Eligible Dependent Credit: Single parents can claim the amount for an eligible dependent, often referred to as the "equivalent-to-spouse" credit, which provides a massive tax break. This credit is especially beneficial for those who are the primary caregivers of their children or other relatives living with them.
Canada Child Benefit (CCB): Single parents typically qualify for higher CCB payments due to lower combined family income compared to dual-parent families. This benefit can substantially offset the cost of raising children.
Elderly or Disabled Dependents
Canada Caregiver Credit (CCC): This non-refundable tax credit is available to individuals who support a spouse, common-law partner, or other eligible relatives with physical or mental impairments. The credit can help reduce your federal tax payable and is calculated based on the level of support provided and the dependent’s income.
Disability Tax Credit (DTC): This credit is designed to reduce the amount of income tax owed by individuals with disabilities or their supporting family members. It requires a certification from a medical practitioner and can be transferred to a family member providing support if the disabled person has little or no taxable income.
Medical Expenses Tax Credit: You can claim a credit for a broad range of medical expenses incurred for a dependent. This includes costs related to prescription drugs, medical devices, and even certain renovations to accommodate a disability.
Shared Custody Situations
Shared CCB Payments: In shared custody arrangements, both parents may be eligible for a portion of the CCB, with payments typically split based on the time each parent spends with the child. It’s essential to notify the CRA of the custody arrangement to ensure accurate benefit payments.
In shared custody, parents may need to agree on who claims certain credits or deductions, such as the Eligible Dependent Credit or childcare expenses. The CRA typically requires that credits are split or alternated between parents annually.
Note: Child support payments are not tax-deductible for the payer and not considered taxable income for the recipient. However, alimony are tax deductible and considered table income.
Common Mistakes to Avoid When Claiming Dependents
Misidentifying Eligible Dependents
A frequent mistake is assuming that only minor children qualify as dependents. While children are often the most common dependents, other family members, such as elderly parents or disabled relatives, can also be claimed under certain conditions.
Incorrectly Claiming Child Care Expenses
Many taxpayers mistakenly claim child care expenses for services that do not qualify, such as fees paid to relatives under 18 or activities not directly related to child care.
Not Updating Dependent Information
Failing to update dependent information with the CRA, such as changes in marital status, custody arrangements, or the birth of a child, can lead to incorrect benefit payments or denied claims.
Overlooking the Canada Caregiver Credit (CCC)
Many taxpayers are unaware of the Canada Caregiver Credit, which can be claimed for supporting a spouse, common-law partner, or eligible relative with a physical or mental impairment.
Failing to Claim the Disability Tax Credit (DTC)
Missing out on the Disability Tax Credit for dependents with disabilities, which can provide substantial tax relief and is transferable to a supporting family member.
Ignoring Shared Custody Rules
Some parents fail to correctly report custody details, leading to incorrect benefit distribution or disputes over claiming dependent-related tax credits.
Failing to Keep Proper Documentation
Inadequate documentation for claimed dependents, such as missing receipts or proof of support, can lead to disallowed claims or audits.
These mistakes can be avoided by reviewing the eligibility criteria for the dependents and and gather the necessary documentation to claim the specific credits. By avoiding these common mistakes you can ensure you receive the full benefits and credits available to you, reduce your taxable income, and avoid complications with the CRA.
