11 April 1996 External T.I. 9610725 - TAXABLE BENEFIT FROM EMPLOYER PROVIDED

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:

taxable benefit arising from child care subsidy

Position:

while there is no benefit if care is provided in-house, a taxable benefit is assessed if the care is provided by a third party or if the care is also offered to the public at large for a fee in excess of that which is charged to the employees

Reasons:

prior position taken in corresp e900396*, e942739*, e942889*, e9033471, e9105165, e58359, e900383* (secondary ref:e9012935)

A. Humenuk
XXXXXXXXXX						961072

Attention: XXXXXXXXXX

April 11, 1996

Dear XXXXXXXXXX:

Re: Employer Provided Child Care

We are replying to your letter of March 6, 1996 in which you request an advance income tax ruling in respect of

XXXXXXXXXX

As discussed with you on March 28, 1996 (XXXXXXXXXX/Humenuk), we are unable to provide an advance income tax ruling because the transactions in question are already in progress. However, we would like to offer some general comments to clarify our position with respect to the benefit derived by an employee from employer-provided child care.

In the situation you describe, two related corporations occupying the same site wanted to make low cost child care available to their employees. In order to limit the employers' liability in respect of the child care to be provided, a non-profit corporation was created to operate the child care centre located on the employers' premises. The facility was open to the children of all employees of the two corporations. In order to keep the fees charged to parents below that which is being charged by other operators for similar child care services (market rates), the two corporations made significant contributions to the non-profit corporation for the operation of the facility. However after 9 months of operation, it was determined that the contribution required of the employers in order to maintain the current rates charged to employees was excessive because of the number of staff required to meet the Ontario Ministry of Community and Social Services guidelines with respect to the ratio of children to caregivers. As a result, it was decided to make the unused placements available to the community at large but to charge market rates for such placements. In this context, unused placements represent the spaces which are available under the terms of the facility's license without increasing staff beyond that which is needed to care for the children of the employees.

The question arises as to whether the employees must include any amount in income as a result of the child care that has been made available to them at a cost which is acknowledged to be below market rates. As you noted in your letter, we have previously stated that no taxable benefit will arise in the hands of the employees where the employer has established an in-house child care facility and makes such facility available to all employees gratuitously or for a minimal fee. This statement requires further clarification.

While paragraph 6(1)(a) of the Income Tax Act (the Act) generally requires an employee to include in income the value of any benefit received or enjoyed in respect of, in the course of or by virtue of employment, certain exceptions exist. In addition to statutory exceptions, paragraphs 27 to 45 of Interpretation Bulletin IT-470R "Employees' Fringe Benefits" set out the Department's position with respect to certain other situations in which we accept that no taxable benefit accrues to an employee. Our position with respect to in-house child care facilities is similar to the position in paragraph 33 of that bulletin with respect to the use of an employer's recreational facilities.

The term "in-house child care" is used in the sense of a child care facility that is managed directly by the employer irrespective of the actual location of that facility. It can be distinguished from child care which is provided by a third party, be it a non-profit organization or a consortium of employers wishing to provide the service to their employees. While it is our general position that no amount is included in an employee's income from the use of child care facilities managed by the employer and available to all employees for little or no cost, this position does not extend where the employer subsidizes a facility which is operated by a third party in exchange for subsidized rates for its employees or where the employer makes the facilities available to non-employees at rates in excess of that which is charged to employees. Where the employer provides child care to the public at large for a fee greater than that charged to its own employees, the difference is considered to be a subsidy to the employee which must be included in the employee's income from employment.

However, it should be noted that where an employee is required to include an amount in income as or on account of the benefit derived from employer assistance with child care, the amount of the benefit included in income will be considered to be an amount paid on account of child care for the purpose of determining the eligible costs under section 63 of the Act. However, the amount deductible by the employee or a supporting person will be limited to the amount otherwise determined under that provision.

We trust these comments have clarified our position with respect to employer-provided child care.

Your deposit will be returned under separate cover.

Yours truly,

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

??