Accounting and tax for daycares in Canada

Business structures in the childcare sector

Daycares and childcare centres operate under three primary structures, each with different accounting requirements.

Non-profit societies and corporations

The majority of licensed daycare centres in Canada are organized as non-profit societies (in BC and Alberta) or non-profit corporations (in Ontario and elsewhere). These entities exist primarily to serve children and families rather than generate profit for owners. Non-profit daycares apply the ASNPO accounting framework (see below) and often receive the bulk of their funding from government subsidies and grants that come with specific reporting conditions.

For-profit corporations

For-profit daycare corporations have grown significantly with national and regional chains. These file a T2 corporate income tax return and may qualify for the small business deduction on the first $500,000 of active business income if the corporation is a Canadian-controlled private corporation. They apply either ASPE or IFRS depending on size and any financing requirements.

Home-based sole proprietors

Many home daycare operators are sole proprietors who report income on the self-employment section of their T1 (line 13500). They can deduct a portion of home expenses (mortgage interest or rent, utilities, insurance) proportional to the space dedicated to childcare. A licensed home daycare with four children in a 2,000 sq ft home where 400 sq ft is dedicated childcare space can deduct 20% of home operating costs. Keep a floor plan and documentation of the childcare-dedicated area.

Revenue sources and recognition

Parent fees

Parent fees are the most straightforward revenue stream — recognize them in the period the service is provided. Keep a clear schedule of who paid when, especially if parents pay monthly in advance. Outstanding balances at year-end are accounts receivable.

Canada-Wide Early Learning and Child Care (CWELCC)

The federal-provincial CWELCC agreements (the "$10/day" program) have fundamentally changed daycare funding. Under CWELCC, provinces and territories receive federal transfers and pass them to licensed providers as operating grants. The grant amounts and eligibility rules vary by province. In Ontario, fee reduction grants under CWELCC reduce the fee you charge to parents — your total revenue per space is the reduced parent fee plus the government top-up. These grants must be disclosed in your financial statements and reported accurately to the funder.

Provincial and territorial subsidies

Beyond CWELCC, most provinces have additional subsidy programs: per-space operating grants, staff wage enhancement grants (particularly for ECEs), capital grants for facility improvements, and need-based fee subsidies for low-income families. Each grant has its own accounting and reporting requirements. Some grants are restricted (earmarked for specific purposes) and must be deferred until the related costs are incurred.

HST exemptions for childcare services

Childcare services occupy a specific exemption in the Excise Tax Act. Understanding it correctly affects your pricing, your cash flow, and your ability to claim ITCs.

The core exemption

Under Schedule V, Part IV of the Excise Tax Act, a supply of a service of supervising or caring for children under 14 years of age is exempt from HST/GST, provided the supply is made by a public sector body or by an individual who provides the service in a home that is the individual's place of residence or the residence of the children. Licensed daycare centres operated by non-profit organizations are public sector bodies and qualify. Licensed for-profit daycares also generally qualify under the exemption's broader scope.

Practically, this means: you do not charge HST on parent fees, and you cannot claim ITCs on most purchases (since ITCs are only available for inputs into taxable supplies). The HST you pay on playground equipment, furniture, and supplies is simply a cost of operating.

Before- and after-school programs

Programs that supervise school-age children for less than 24 hours a day can still be exempt if the children are under 14. The key is that the service is substantially childcare rather than education. Programs that cross the line into educational delivery (tutoring centres, specialty academic programs) may be treated as taxable. Get a written analysis from your accountant if you are expanding into before/after school care — the answer is not always obvious.

Meal programs

Meals included in the childcare fee are part of the exempt service and do not trigger HST separately. If you offer a stand-alone catering or meal service to children not enrolled in your program, that would be a separate analysis.

Payroll and ECE compensation

Payroll is typically the largest expense for a licensed daycare — often 60–70% of total costs. Getting it right matters for compliance and for staff retention.

Standard employer obligations

All employees — full-time, part-time, and substitute staff — require T4 slips. CPP contributions (both employee and employer share) and EI premiums must be deducted and remitted. Vacation pay accrues from the first day of employment (minimum rates vary by province, typically 4% for the first five years). Many daycare staff work irregular hours across multiple shifts — make sure your system tracks hours accurately.

ECE wage enhancement grants

Most provinces have introduced specific wage enhancement grants for registered early childhood educators to address the sector's chronic underpayment. These grants typically flow to the employer, who must pass them through to qualifying staff and document that they have done so. The grants are employment income to the employee and appear on their T4. From the employer's perspective, the grant is revenue offset by the additional wage expense — net zero if administered correctly.

Independent contractors at a daycare

Some daycares hire program specialists, nutritionists, or speech-language pathologists as independent contractors. CRA applies the same four-factor test (control, ownership of tools, chance of profit/risk of loss, integration) to determine whether the relationship is truly a contractor arrangement. Someone who works exclusively for your daycare, follows your schedule, and uses your supplies is likely an employee regardless of what the contract says. Misclassifying employees as contractors means unpaid CPP, EI, and income tax withholdings — plus penalties.

Non-profit daycares: ASNPO and grant accounting

Non-profit daycares apply the Accounting Standards for Not-for-Profit Organizations (ASNPO). The most significant accounting challenge is handling restricted contributions under the deferral method (most common) or the restricted fund method.

When a provincial government gives you a capital grant to purchase playground equipment, that grant is restricted — it cannot be used for general operations. Under the deferral method, you record it as deferred revenue when received and recognize it as revenue over the useful life of the equipment, matching it against the depreciation expense. This treatment reflects that you earned the grant by incurring the capital cost it was meant to fund.

Operating grants that reimburse specific costs (ECE wages, program materials) are recognized as revenue in the period the costs are incurred. An operating grant that arrives in January for a program running April through June is deferred until the program runs.

Get detailed notes from your subsidy agreement about what the funds are for — this drives the accounting. Many NPO daycare disputes with auditors arise from ambiguous grant agreements that make it unclear whether a payment is restricted or unrestricted.

Capital assets and CCA

For-profit daycares claim Capital Cost Allowance (CCA) on capital assets. Common assets and their CCA classes:

• Buildings (owned): Class 1 (4%) for most structures, Class 6 (10%) for older wood-frame buildings
• Furniture and fixtures (cots, highchairs, storage): Class 8 (20%)
• Computer equipment: Class 50 (55%)
• Playground equipment: Class 8 (20%)
• Vehicles used to transport children: Class 10 (30%), subject to the $34,000 ($61,000 for ZEVs) passenger vehicle cost ceiling if they are passenger vehicles

Non-profit daycares record depreciation (amortization) rather than CCA, since CCA is a tax concept. The amortization method and rate should reflect how the asset is actually used up — straight-line over useful life is most common for daycare equipment.

CRA audit triggers for daycares

Cash receipts and unreported income

Daycares that accept cash payments from parents face the same scrutiny as any other cash-intensive business. CRA can use a net worth assessment — comparing your personal assets at the beginning and end of a period against reported income — to estimate whether you are understating revenue. Keep detailed fee schedules and payment records. Accept e-transfers or cheques instead of cash where possible.

Receipts issued to parents

Parents who claim the Child Care Expense deduction on line 21400 need documentation. CRA routinely reviews these claims and may contact the daycare to verify the amounts. Your records of fees paid need to match what parents are claiming. Discrepancies create problems for both parties.

Home daycare home-use claims

Home-based daycare operators who claim a large percentage of their home as business space — especially if the space seems disproportionate to the number of children cared for — attract CRA review. Be conservative and document the actual dedicated childcare area. CRA may ask for photos or a floor plan.

Finding the right accountant for your daycare

The ideal accountant for a daycare understands both structures: non-profit (ASNPO, grant accounting, T3010 if the NPO is a registered charity) and for-profit (T2, ASPE, SBD). A few questions to ask when evaluating accountants:

• Have you worked with licensed childcare centres before? How many?
• Are you familiar with CWELCC operating agreements and how to account for the grants?
• Do you understand the HST exemption for childcare services?
• Can you help us understand our reporting obligations to provincial funders?
• Do you have experience preparing financial statements for non-profit daycares?

Many daycares are small organizations without a full-time bookkeeper. Monthly bookkeeping support from an accounting firm with daycare experience can prevent a year of errors from compounding into a year-end problem.

Frequently asked questions