Many of my clients are self-employed and run a daycare in their homes for additional income. Questions that I am often asked include: “how do I deduct toys and groceries?” and “what information do I need to include on my receipts?”
This Tax Tip segment will answer those questions and discuss how to calculate your income and classify your deductible expenses.
Reporting your Income
As a self-employed person, your fiscal year is the calendar year, being from January 1st to December 31st.
Your gross income for the year must be calculated for that date using the accrual method of accounting. This means that you must include fees that you earned during the year, even if the amounts were not yet received by December 31st.
Business activities are reported on the CRA Form T2125: Statement of Business or Professional Activities. The first section of the form asks for a “North American Industry Classification System” (NAICS) code. For day cares, the applicable code is 624410 – Child Day-Care Services.
GST/HST on Daycare Services
Your daycare is exempt from GST/HST if the primary purpose is to provide care and supervision to children 14 years of age or under for periods of less than 24 hours per day. This means that you cannot register for the GST/HST and you cannot claim “input tax credits” on purchases that the daycare makes.
Allowable Business Deductions
As with all other businesses, you can deduct any expenses that you reasonably incurred to earn your daycare income. In order to remove any doubt, it is recommended that personal expenses are paid for separately from daycare expenses. For example, groceries should be rung up separately when paying at the till. Receipts for all expenses should be kept for six years from the end of the taxation year in case your file is selected for audit at a later date.
In general, deductible expenses include:
Advertising, such as ads and business cards.
Business-use-of-home expenses – if your home is used for your daycare business, you can claim home expenses for the amount of time that the home was used for the daycare business. You must consider the hours that your daycare was open and the space (eg. square footage) that was used.
For example, if you had $1,000 of expenses, you used 500 of 1,000 square feet of your home space, and your daycare was open for 4 days a week, from 1pm to 5pm, you would be allowed the following deduction:
$1,000 x 500 / 1,000 sq. ft. x 4 / 7 days a week x 4 / 24 hours a day = $47.62
Expenses to run your home include:
Utilities (BC Hydro, Fortis BC, water, sewer)
Maintenance (eg. painting a room)
Mortgage interest or rent
A final note: the business-use-of-home expenses cannot be used to create business loss, but excess expenses can be carried forward and used in a future year, as long as they do not create a loss in that later year.
Business taxes, fees, memberships, subscriptions, except club membership fees.
Capital cost allowance (CCA) – the cost of long-lived assets such as vehicles (10%) or furniture or office equipment (20%) are deducted at a set rate over a number of years; they cannot be deducted all in the current year.
Field trips – receipts for entry or parking on outings must be kept. Personal motor vehicle costs are discussed below.
Legal, accounting, and other professional fees, including those incurred to keep or file your records.
Maintenance and repair – you can deduct labour and materials for any minor repairs or maintenance to your property; however, you cannot deduct the value of your own labour or expenses for major repairs.
Management and administration fees includes bank charges to process payments.
Motor vehicle expenses – you may claim motor vehicle expenses if you used your vehicle to take the children on field trips. You must record your fiscal opening and ending odometer and keep a detailed record of the total kilometres driven for your daycare.
Office expenses are considered small items, such as stamps. Chairs and desks are considered long-lived assets and are included under your CCA claim above.
Salaries, wages, and benefits are amounts paid for employees that you hire. You may hire a spouse or child as long as they are paid a salary, the work they perform is necessary for the business, and the salary is comparable to what you would pay someone else to do the job.
Supplies include the cost of toys, books, arts and crafts, diapers, cleaning supplies, and groceries purchased to feed the children.
Receipts must be issued to each child under your care separately and must include the following information:
Name of the person receiving the receipt
Name of the child
The amount received for your services
The services dates
Your SIN (for licence-not-required centres)
The receipt date.
Receipts do not need to be filed with the Canada Revenue Agency, but should be provided to the guardians as soon as possible after year-end for them to prepare their tax returns.
All documents that support your income and expenses must be kept for six years following the applicable taxation year.
Supporting documents include:
Receipts and bills,
Bank statements, and
Get in Touch with OMNI if you have questions about your daycare-in-home expenses! We will provide you with a free expense checklist to guide you through filing your self-employment tax return, which is due on June 15th of every year.