5 May 1995 External T.I. 9430895 - CHILD CARE EXPENSE FOR UI RELATED BUSIN & EMPL INCOME

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether UI benefits received in conjuction with the self employment assistance program or the Unemployment Insurance Job Creation Program -section 25 qualify as earned income for purposes of the child care expense limitation

Position TAKEN: no

Reasons FOR POSITION TAKEN:

the amounts received are benefits under the UI Act & are not in connection with the cost of a course or program designed to facilite re-entry into the labour force

Youth Programs and Services
Human Resources and Development Canada
4th Floor, Place du Portage, Phase IV
140 Promenade du Portage A. Humenuk
Hull, Quebec 943089
K1A 0J9

Attention: Jean-Pierre Lecours
Director

May 5, 1995

Dear Sirs:

Re: Child Care Expense Tax Deduction for UI Claimants

We are replying to your letter of November 17, 1994 concerning child care expenses incurred by UI claimants participating in the Self-employment Assistance Program or the Unemployment Insurance Job Creation - Section 25 program. We apologize for the delay in responding.

As we understand it, the Self-employment Assistance Program (SEA) offers income support, training and advice to enable individuals receiving social assistance payments or unemployment insurance benefits to start their own business. For those individuals who are entitled to unemployment insurance benefits at the time of acceptance into the program, the income support is provided by means of continued benefits under the Unemployment Insurance Act whereas the income support provided to individuals entitled to social assistance at the time of acceptance into the program is provided through grants.

As explained to us, the Unemployment Insurance Job Creation program (UIJC - section 25) permits UI claimants to accept short term employment on projects approved under the program without disqualifying the claimant from receiving regular unemployment insurance benefits. It is our understanding that subsection 25(12) of the Unemployment Insurance Act is the authority used to treat any employment income earned on an approved project as a benefit under the Unemployment Insurance Act for the purposes of that Act. We further understand that many of the projects approved under the plan involve non-profit organizations and provide little or no direct income to the claimant although we understand that your Department may pay the individual an amount in addition to the continuing unemployment insurance benefits.

You have asked us to reconsider our interpretation of the nature of the payments made to UI claimants under these two programs with a view to permitting the recipient to include the benefits received as part of earned income for the purpose of the child care expense deduction. In the event that such an interpretation is not possible, you have asked that the Income Tax Act (the Act) be amended so that the child care expenses incurred would be deductible by the participant.

While child care expenses incurred to engage in the type of activity required by the two programs fall within the definition of child care expenses as found in subsection 63(3) of the Act, amounts which are included in income under subparagraph 56(1)(a)(iv) of the Act are not included in the calculation of earned income as defined in subsection 63(3) of the Act. As a result, the child care expense deduction claimed by an individual participating in the programs may be reduced or denied by reason of the earned income limitation.

Subparagraph 56(1)(a)(iv) of the Income Tax Act requires the inclusion of

"a benefit under the Unemployment Insurance Act, other than payment relating to the cost of a course or program designed to facilitate the re-entry into the labour force of a claimant under that Act".

It is our view that payments received under the above noted programs by individuals eligible for unemployment insurance benefits are taxable under paragraph 56(1)(a)(iv) of the Act notwithstanding that the recipient is required to be engaged full time in the operation of a business or to work on short term projects. Dependant care allowances received under the authority of the Unemployment Insurance Act in conjunction with these programs would also be taxable under subparagraph 56(1)(a)(iv) of the Act.

The exception in subparagraph 56(1)(a)(iv) of the Act for payments relating to the cost of a course or program designed to facilitate re-entry into the labour force relates to training courses and programs which provide the individual with additional skills which will better prepare the individual to become re-employed. As we understand it, the SEA and UIJC - Section 25 programs are not designed for that purpose. Under the SEA program it is expected that participants will become entrepreneurs rather than re-enter the labour force and in the case of the UIJC- section 25 program, the employment does not aid the individual in obtaining other employment but rather offers UI claimants an opportunity to use already acquired skills for worthwhile projects while waiting for employment opportunities to arise.

Any amount of business income earned under the SEA program or any employment income under the UIJC program which is not paid as a benefit under the Unemployment Insurance Act will qualify as earned income for the purpose of the child care expense deduction. However, any amount received as an unemployment insurance benefit, including amounts which are deemed not to be employment income for tax purposes under subsection 25(3) of the UI Act, will not qualify as earned income for the purpose of the child care expense deduction.

As stated in our previous letter to you of March 15, 1994, SEA payments received by an individual entitled to social assistance are included in income as business income and not as unemployment insurance benefits. Thus, an individual who would otherwise be entitled to social assistance is able to include the amount of SEA payments received in the calculation of earned income for child care expenses.

The responsibility for amendments to the Income Tax Act rests with the Department of Finance. They have been made aware of your concerns.

We trust our comments have clarified the basis on which child care expenses can be reduced in the circumstances you describe.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Legislative Policy Division