If you run a daycare out of your home, the Canada Revenue Agency considers you a self-employed individual. Accordingly, you are required to file your taxes as a business owner. While the process may seem daunting — especially if you are filing as a business owner for the first time — it may be easier than you expect.
Your daycare income is the money you receive from your clients, but can also include any grants you receive. However, if you received a grant and made a capital purchase with some of the money, you may not have to claim that portion of the grant as income.
As a self-employed individual, you can deduct all of the expenses you reasonably incur as part of your daycare business. These include advertising, field trip expenses, vehicle expenses, maintenance, repairs and other expenses. It also includes business-use-of-home expenses.
To calculate your business-use-of-home expenses, measure the space that you use for your daycare and express it as a percentage of your home’s total size. For example, if your daycare area measures 20 square metres and your entire home is 200 square metres, use 10 percent.
Multiply that figure by expenses including mortgage or rent, utilities, and repairs related to your entire home.
If you use your space for both your daycare and for personal use, you must do an additional calculation. Figure out what percentage of time your space is used for daycare and multiply that percentage by the figure you arrived at above.
For example, if your daycare is open 50 hours per week, you use the space as a daycare 30 percent of the time based on a 168-hour week.
Make sure to keep copies of all of your bills and receipts in case of an audit or reassessment. The CRA requires you to keep these records for six years.
If you have employees for your daycare, you can also claim their pay as an expense. However, note that you are also required to remit Canada Pension Plan contributions, Employment Insurance Premiums and payroll tax to the CRA.
As soon as you hire an employee, use the CRA’s Business Registration Online service to set up a business number and a payroll account. This account helps you calculate your payments and pay them easily online.
Many of your clients will qualify for tax benefits based on daycare expenses. To claim these benefits, they will ask you to provide a receipt.
According to the CRA, these receipts must include the name of your client, the name of the child in daycare, the amount of money received and the dates of service. They must also contain your name, address, social insurance number, signature and date.
Filing Your Tax Return
Report the income from your daycare business on line 162 of your general income tax return. Then, deduct your business expenses to arrive at your net self-employment income on line 162.
One of the easiest ways to calculate your daycare income and expenses is by using the CRA’s Form T2125, Statement of Business Activities. However, the CRA accepts other financial statements, as well.