Symes v. The Queen, 89 DTC 5243, [1989] 1 CTC 476 (FCTD), rev'd 91 DTC 5397 (FCA)

Cullen, J.: —This is an appeal from reassessments of tax for the plaintiff's 1982, 1983, 1984 and 1985 taxation years. In these reassessments the Minister of National Revenue (M.N.R.) disallowed the deductions of $10,075, $11,200, $13,173 and $13,359 paid in respect of a Mrs. Simpson's (Simpson) salary as a business expense for the 1982, 1983, 1984 and 1985 taxation years respectively; and instead allowed a revised child care deduction of $1,000 in respect of the 1982 expense, a $2,000 deduction in respect of the 1983 and 1984 expense and a $4,000 deduction in respect of the 1985 expense.

The plaintiff, during the period in question, was a full-time practising lawyer and a partner in a law firm in Toronto. In the 1982, 1983, and 1984 taxation years the plaintiff was the mother of one daughter and in 1985 was the mother of two daughters. Both children are of pre-school age. The plaintiff is married. As she was involved on a full-time basis with her business, she employed Simpson as a nanny in order to ensure that her daughters would be properly cared for at home. There is no dispute that Simpson’s duties were solely and entirely to care for the plaintiff's daughters.

In each of the taxation years the plaintiff issued a T-4 slip to Simpson and Simpson paid tax on the amount she received as wages. The plaintiff also deducted from Simpson's wages and remitted to Revenue Canada Simpson's income payments, Canada Pension Plan contributions and Unemployment Insurance premiums. When the plaintiff filed her income tax returns, she deducted the amounts paid in respect of Simpson's wages as business expenses.

By notice of assessments in respect of the 1983 and 1984 taxation years, Revenue Canada accepted the plaintiff's deduction of Simpson's salary as a business expense. However, by notices of reassessment dated December 9, 1985 and November 7, 1986 the plaintiff was advised that the deductions claimed for Simpson's salary had been disallowed and that: (1) a revised child care deduction of $1,000 had been allowed in respect of the 1982 taxation year; (2) a revised child care deduction of $2,000 had been allowed in respect of the 1983 and 1984 taxation years; and (3) a revised child care deduction of $4,000 had been allowed in respect of the 1985 taxation year.

The basis for the disallowances was that the wages paid to Simpson were not outlays or expenses incurred for the purpose of gaining or producing income from business, but were personal or living expenses. The amounts allowed were for child care expenses under subsection 63(1) of the Income Tax Act (the Act).

The plaintiff objected to the disallowances of the deductions for all four tax years by notices of objection dated March 7, 1986 and December 23, 1986. The reassessments were confirmed by notice of confirmation dated May 20, 1986.

Plaintiffs Position:

The plaintiff maintains that the expenses of the wages claimed for each tax year in question were properly deductible as these expenses were part of the calculation of the plaintiff's income from business under section 9 of the Act and that these expenses were made for the purpose of gaining or producing income from the business, within the meaning of paragraph 18(1)(a) of the Act. The plaintiff submits that if Simpson had not been caring for the plaintiff's two daughters, the plaintiff would not have been able to engage in the practice of law and would have earned no income from that business (i.e. the law firm) during the taxation years in question. Therefore it was reasonable for the plaintiff to hire Simpson to ensure that her daughters were properly cared for while the plaintiff was earning income from the business. Moreover, by so doing, the plaintiff also fulfilled her legal obligation to care for her children, as required by section 197 of the Criminal Code, R.S.C. 1970, c. C-34 as amended, and clauses 19(1)(b)(ii) and (iii) of the Child Wefare Act, R.S.O. 1980, c. 66, as amended.

The plaintiff contends that section 63 of the Act (the child care deduction provision) does not adversely affect the plaintiff's claim because: (1) the deduction of an expense in calculating the profit from a business in accordance with sections 9 and 18 of the Act is a separate item from a section 63 deduction and (2) section 67 of the Act allows a taxpayer to make a deduction for an outlay or expense in respect of which any amount is otherwise deductible "to the extent that outlay or expense was reasonable in the circumstances".

The plaintiff further submits that the M.N.R.'s disallowance of the deduction of the expenses claimed violates the guarantee of equality set out in subsection 15(1) of the Canadian Charter of Rights and Freedoms (the Charter) for the following reasons: (1) the disallowance as a business expense of child care expenses incurred to permit a parent to earn income from a business, while requiring a parent/employer to make deductions from income at source, provide a T-4 and make remittances of the employee and employer portion of Unemployment Insurance and Canada Pension Plan premiums, amounts to an invidious distinction between the parent/ employer and other employers, who are allowed to deduct from business income the wages paid to employees as well as the employer share of Unemployment Insurance and Canada Pension Plan contributions. Accordingly, such disallowance constitutes a denial of the equal benefit of the law; and (2) the disallowance as a business expense of child care expenses incurred to permit a parent to earn income from a business has a disproportionate impact on women, who remain in fact primarily responsible for child care in our society, and therefore constitutes a denial of the equal benefit of the law on the basis of sex.

The plaintiff also maintains that the limitations on her equality rights noted above do not amount to reasonable limits imposed by law which are demonstrably justified in a free and democratic society (i.e. section 1 of the Charter).

Defendant's Position:

The defendant submits that the M.N.R. properly disallowed the salary paid to Simpson as a business expense because the amounts in question were not outlays or expenses made or incurred by the plaintiff for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Act but were personal or living expenses within the meaning of paragraph 18(1)(h) and subsection 248(1) of the Act. Further, the M.N.R. correctly reassessed the plaintiff and allowed the deductions of $1,000, $2,000, $2,000 and $4,000 for the 1982, 1983, 1984 and 1985 taxation years respectively, as child care expenses in accordance with subsection 63(1) of the Act.

The defendant maintains that the disallowance of the deduction sought by the plaintiff for the amounts in question pursuant to paragraphs 18(1)(a) and 18(1)(h) does not conflict with any provisions of the Charter. The defendant also submits that the provisions of section 15 of the Charter do not apply to the 1982, 1983 and 1984 taxation years.

Therefore, essentially what has to be determined in the case at bar is the proper characterization of the payments made by the plaintiff to Simpson.

Deductibility of Simpson's salary under the Income Tax Act:

In dealing with the taxation aspect of this case, the first matter to be addressed is whether the salary paid to Simpson may be deducted as an expense under section 9 and paragraphs 18(1)(a) and 18(1)(h) of the Act. Subsection 9(1) states that a taxpayer's income for a taxation year from a business or property is his/her profit therefrom for the year. Paragraph 18(1)(a) of the Act provides a general restraint on the deductions permitted in the computation of a taxpayer's income from a business or property by prohibiting the deduction of outlays or expenses except to the extent that they were made or incurred by the taxpayer for the purpose of gaining or producing income. Paragraph 18(1)(h) contains a further limitation in that it prohibits the deduction of personal or living expenses.

The determination of profit and the question of whether an expenditure is a proper business expense to be included in the calculation of profit are questions of law:

There is no doubt that the proper treatment of revenue and expenses in the calculation of profits for income tax purposes with a view to obtaining an accurate reflection of the taxable income of a taxpayer, is not necessarily based on generally accepted accounting principles. Whether it is so based or not is a question of law for determination by the Court having regard to those principles (see: M.N.R. v. Anaconda American Brass Ltd. [1956] A.C. 85: [1955] C.T.C. 311; 55 D.T.C. 1220: see also: Associated Investors of Canada Ltd. v. M.N.R., [1967] Ex. C.R. 96; [1967] C.T.C. 138: 67 D.T.C. 5096).

per Urie, J., Neonex International Ltd. v. The Queen, [1978] C.T.C. 485 at 499; 78 D.T.C. 6339 at 6348 (F.C.A).

After reviewing the cases, I agree with counsel for the plaintiff that the proper approach to be taken when dealing with the question of what expenses are to be considered business expenses in the calculation of business profits is to ascertain whether the expense or disbursement was consistent with ordinary principles of commercial trading or well accepted principles of business practice. (Royal Trust Co. v. M.N.R., [1956-60] Ex. C.R. 70; [1957] C.T.C. 32; 57 D.T.C. 1055 (Ex. Ct.), Neonex, Mattabi Mines Ltd. v. Minister of Revenue (Ontario), [1988] 2 S.C.R. 175); [1988] 2 C.T.C. 294.

The defendant put forward a number of cases (Ass. Investors of Canada Ltd. v. M.N.R., [1967] 2 Ex. C.R. 96; [1967] C.T.C. 138; Mandel v. The Queen, [1976] C.T.C. 545; 76 D.T.C. 6316 (F.C.T.D.), appealed [1978] C.T.C. 780; 78 D.T.C. 6518 (F.C.A.); Bank of Nova Scotia v. The Queen, [1980] C.T.C. 57; 80 D.T.C. 6009 (F.C.T.D.), appealed [1981] C.T.C. 162; 81 D.T.C. 5115 (F.C.A.); Canadian General Electric Co. v. M.N.R., [1962] S.C.R. 3; [1961] C.T.C. 512; M.N.R. v. Anaconda American Brass Ltd., [1956] A.C. 85 P.C.; [1955] C.T.C. 311) in support of the proposition that "business practice" can be determined only by means of accounting evidence. In general, these cases involve an attempt by a taxpayer to use a particular method of accounting to escape tax liability and for this reason the focus was on the “principles of accounting" test rather than on a business practice test. Therefore, I am satisfied that the test is a business test, not an accounting test. However, this does not necessarily mean that accounting evidence, if presented, should not be considered, just that it should not be determinative of the issue.

Thus profit from a business, subject to any special direction in the statute, must be determined in accordance with ordinary commercial principles and business practice, having regard to the circumstances of each particular case. Further, for the expense in question to be deductible it must also be made or incurred for the purpose of gaining or producing income from the business.

The question of whether an outlay or expense was incurred for the purpose of earning income has been the subject of much judicial consideration. There is no point in attempting to review all the case law on this subject; instead I propose to illustrate that there is an increasing tendency to interpret paragraph 18(1)(a) of the Act more liberally. In the case of Royal Trust Co. v. M.N.R., supra, the Exchequer Court found that club dues paid for its executives by the company were deductible. Thorson, P. made the following comments at page 1060:

Thus, it may be stated categorically that in a case under The Income Tax Act the first matter to be determined in deciding whether an outlay or expense is outside the prohibition of section 12(1)(a) of the Act is whether it was made or incurred by the taxpayer in accordance with the ordinary principles of commercial trading or well accepted principles of business practice. If it was not, that is the end of the matter. But if it was, then the outlay or expense is properly deductible unless it falls outside the expressed exception of section 12(1)(a) and, therefore, within its prohibition.

He continued at page 1062:

The essential limitation in the exception expressed in section 12(1)(a) is that the outlay or expense should have been made by the taxpayer “for the purpose" of gaining or producing income “from the business". It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income “from the business” in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thus, in a case under The Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is deductible for income tax purposes.

This case is significant because of the relative remoteness of the expenditure from its purpose and for the emphasis given to purpose rather than result.

Further, in Premium Iron Ore v. M.N.R., [1966] S.C.R. 685; [1966] C.T.C. 391; 66 D.T.C. 5280 (S.C.C.) the Court allowed the deduction of legal expenses incurred in protecting income already earned. The expenses in question were incurred in making preparations to dispute a claim that had been made by the U.S. Internal Revenue Service.

Jackett, P. in Olympia Floor & Wall Tile (Quebec) Ltd. v. M.N.R., [1970] Ex. C.R. 274; [1970] C.T.C. 99; 70 D.T.C. 6085, held that all the contributions made by the appellant that were over $100 were deductible under paragraph 12(1)(a) in computing the appellant's income; the remainder of the contributions were deductible under paragraph 27(1)(a) as charitable donations. These larger contributions made to charitable organizations (about $8,000 in 1962 and $10,000 in 1963) were expenditures laid out by the company mainly (if not entirely) for the purpose of increasing or maintaining its sales and only subsidiarily, if at all, for charitable purposes. Jackett, P. noted at page 6089 of his judgment:

In my view, when a taxpayer makes an outlay for the purpose of producing income - i.e. as part of his profit making process—even though that outlay takes the form of a “gift” to a charitable organization, it is not a "gift" within the meaning of that word in section 27(1)(a) which by reason of the place it holds in the process of computing taxable income, was obviously intended to confer a benefit on persons who made contributions out of income and was not intended to provide deductions for outlays in the course of the income earning process.

In Aluminum Co. of Canada Ltd. v. The Queen, [1974] 1 F.C. 387; [1974] C.T.C. 471; 74 D.T.C. 6408 (F.C.T.D.) payments made by the taxpayer to its Jamaican subsidiary as a result of pressure from the Jamaican government were allowed as deductible expenses because the payments were necessary as a practical and business decision if the taxpayer was to enjoy continued friendly relations with the Jamaican government.

Another case worth noting is Holmes v. The Queen, [1974] C.T.C. 156; 74 D.T.C. 6143 (F.C.T.D.). In that case, the taxpayers were partners in a law firm. The partners' wives incorporated a management company to take over the administrative functions of the law firm. Under the agreement between the firm and the company, the company would pay for the expenses the law firm incurred for its services and then the law firm would reimburse the company for the expenses plus a 15 per cent management fee. The Court held that each of the taxpayers (partners) was entitled to deduct his share of the fee. The Court was convinced that, based on the evidence, the setting-up of a management firm considerably increased the efficiency of the law firm’s operation. Cattanach, J. noted at pages 167-68 (D.T.C. 6151):

There was evidence adduced that a management fee of 15% of the disbursements made on behalf of a customer is the normal and going rate for services of this kind. For that reason the payment of a management fee in that amount would not unduly reduce the income of the payer if the expense was incurred for legitimate business reasons.

In my view the propriety of the deduction of the management fee fails to be decided upon a determination of the question whether genuine business reasons existed for payment of the management fee under this contract.

In concluding that the payment of the management fee was an expense incurred for the purpose of gaining or producing income from the plaintiffs’ business, I found that true business motivation existed with consequent business advantages.

There is no dispute that salaries paid to employees are deductible as business expenses, provided they are laid out to earn income and are reasonable. Further, under certain circumstances, wages or salaries paid to spouses or children are also deductible as business expenses. If this is so, the plaintiff contends, why shouldn't the wages paid to the plaintiff's nanny be deductible as a business expense? Certainly, if the plaintiff hired a junior lawyer or articling student whose duties also included looking after the partner's children (if perhaps a daycare service was provided by the firm), there would be no dispute that the wages of the junior or the articling student would be deductible as a business expense.

In his argument counsel for the defendant introduced the concept of the "business or revenue producing circle”, arguing that expenses that bring the taxpayer up to, but still outside, the circle are not proper business deductions and therefore only those made "within" the revenue-producing circle can be said to be properly deductible. Counsel characterized the payment of the nanny's salary as an expense which enabled the plaintiff to go out and practise her profession but was not incurred in the practice of her profession. This concept as proposed by counsel, would seem to suggest that the business or revenue-producing circle has a fixed content, namely limited to those items which are within the circle and that other expenditures cannot be added to the circle.

The idea of a "fixed content" circle seems to me to be contrary to the language of the relevant provisions of the Act and contrary to the trends in the jurisprudence interpreting these provisions of the Act. The Act does not contain a definition of the term "profit". Instead, Parliament, by not fixing the definition or content of the term "profit" by any type of legislative enactment, has determined that judicial interpretation shall infuse the term with meaning, which will reflect the realities of the times. Further, as I indicated earlier, it is clear from the case law that the Courts have given a more progressive interpretation to the wording of paragraph 18(1)(a) of the Act. After the decisions in Imperial Oil Ltd. v. M.N.R., [1947] Ex. C.R. 527; [1947] C.T.C. 353; 3 D.T.C. 1090 (Ex. Ct.), Royal Trust, supra, Parkinson v. M.N.R., (1951-52) 5 T.A.B. 8; 51 D.T.C. 323 (T.A.B.), Olympia Floor, supra, damages, club dues, conference expenses and charitable donations respectively were considered to be acceptable and proper deductions from business income. Thus the concepts of "profit" and what is considered a proper business deduction have been adapted to reflect the changing ways of doing business. Indeed, had Parliament not allowed the concept to be interpreted and reinterpreted by the Courts, allowable business deductions would be frozen where they were at the time of the enactment of the predecessor of paragraph 18(1)(a) of the Act.

Dr. Patricia Armstrong (Armstrong) was called as an expert witness and I qualified her as such after hearing evidence, followed by arguments of counsel. Counsel for the defendant then took the following position (p. 214 of the transcript):

MR. POWER: My Lord, in light of your last ruling and in consultation with my learned friend during the break, I wish to propose the following to Your Lordship. I have mentioned this to my learned friend.

Instead of my standing up on behalf of the Crown and objecting to the relevancy of each and every paragraph, beginning with paragraph No. 5 of Dr. Armstrong's affidavit, which goes from paragraph No. 5 right to paragraph No. 22, I will with Your Lordship's permission, at this juncture for the record object to the relevancy of each and every one of those paragraphs based on its relevancy to the circumstances of this case as I had noted it from the Constitutional Question stated by my learned friend.

So therefore, My Lord, if it can be taken that the Crown has objected to each and every one of those paragraphs, I will not stand up unless other objections arise on the question of relevancy because the objection will be noted now and that will facilitate the expedition of the evidence of this witness.

Armstrong's evidence reveals that the influx of women of child bearing age into entrepreneurship and the workplace, especially in the 1970s and after, has effected a major change in the landscape and in the very conduct of business. Thus the question of the deductibility of Simpson's salary must be interpreted in view of the social and economic realities of the times.

Counsel for the defendant put forth a number of cases decided in the 1950s and 1960s where the Courts disallowed nanny expenses as a legitimate business deduction. The expenses were considered to be personal or living expenses within the meaning of paragraph 18(1)(h) (actually its predecessor) of the Act. After reviewing these cases, I agree with counsel for the plaintiff's comments that the root of the reasoning that underlies these cases is the reasoning from the 1891 case of Bowers v. Harding, [1891] 1 Q.B. 560. The Bowers case arose at a time when there were very rigid restrictions on women and very fixed ideas about what was proper for women and what was the position of men, in terms of employment and income. The case came from another age, from another system dealing with a tax question that related to employment rather than profits from a business. Moreover, the case is full of illustrations of the subordinate position of women in that society and that law.

As shown by Armstrong's evidence, there has been a significant social change in the late 1970s and into the 1980s, in terms of the influx of women of child-bearing age into business and into the workplace. This change postdates the earlier cases dismissing nanny expenses as a legitimate business deduction and therefore it does not necessarily follow that the conditions which prevailed in society at the time of those earlier decisions will prevail now. For this reason I do not see why I should be limited in my interpretation of what is a proper business expense as it relates to nanny expenses, by a cluster of cases decided in the 1950s and 1960s based on the reasoning of a decision made in 1891.

I am satisfied on the facts of this case that the plaintiff exercised good business and commercial judgment in deciding to dedicate part of her resources from the law practice to the provision of child care. This decision was acceptable according to business principles which include the development of intellectual capital, the improvement of productivity, the provision of services to clients and making available the resource which she sells, namely her time.

Further, Armstrong's evidence supports the notion that the availability of child care increases productivity by enhancing the peace of mind of employees. Enhancing productivity is something that is totally in keeping with well established business practices. Moreover, Armstrong's evidence indicates that the absence of child care is a barrier to women's participation in the economy, in terms of paid work and income-generating work and therefore lowering the barrier by arriving at a satisfactory means of dealing with the costs of child care, would make good business sense.

The plaintiff submits that her participation in the profession of law was made possible because of Simpson's work in her home. It would seem that putting oneself in the position as a professional to generate income is in accordance with good business principles. The plaintiff testified that her business involved essentially selling her time and expertise to her clients. She maximized the profit derived from her time and expertise by being able to devote that time and expertise to her work on a full-time basis. The plaintiff was also able to keep the hours on a daily basis that she required to accommodate the demands of her work, because Simpson was looking after her children. Thus, I think it can be said that there is a causal relationship between the dedication of resources generated in her practice to child care and the generation of those resources.

With respect to the plaintiff's manner of reporting the nanny expense, namely as an item on her personal income tax form rather than on the partnership's financial statement, I agree with the plaintiff's submission that in partnership situations, it does not matter where one claims an expense, as long as it is a proper deduction (see Parkinson v. M.N.R., supra). It seems to me that a proper determination of whether an item is deductible should be based on the nature of the expense, not on the piece of paper on which it is or was claimed.

Further, as I indicated earlier, the case law is clear that accounting principles do not necessarily have to be taken into consideration in determining profit under business principles. This is especially so in the case before me, as no expert accounting evidence was tendered.

In the terms of the submission that the nanny expense falls within paragraph 18(1)(h) of the Act, it seems to me that on the facts of this particular case, a distinction has been made between child care which allows one to participate in the economy and generate income and child care which allows one to go out on social occasions or the hiring of a maid to ease one's life. These last two are clearly discretionary and personal living expenses.

The defendant argued that the plaintiff's nanny costs are equivalent to any of the basic personal maintenance expenses that any business person has to pay in order to work and that the nanny costs are equivalent to the equipment used by the disabled in order to work and therefore not deductible. With respect, I do not agree with these analogies. What makes this case unique is that the law is clear that the plaintiff has a legal obligation to look after her children and it is this legal obligation which distinguishes the provision of child care from other kinds of expenses that have been or could be characterized as personal living expenses.

Therefore, in light of the above, and in the particular circumstances of this case, I find that the salary paid to the nanny qualifies as an expense made for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Act.

With respect to section 63 of the Act, I would like to note at this point in my reasons that the defendant has admitted that if the nanny expense is a proper business expense pursuant to sections 3, 9 and 18 of the Act, then section 63 cannot prevent it from being allowed as such.

Reasonableness (section 67 of the Act):

Section 67 of the Act places a limitation on the amount of an outlay or expense that may be deducted. The test is what is “reasonable in the circumstances". In the case before me there is no question that the wages paid to Simpson were reasonable. In this regard I note that the Regulations under the Employment Standards Act of Ontario require that a nanny working in a private home be paid a minimum of $757 per month or $9,084 per year (O. Reg. 75/84, s.1 and ©. Reg. 39/85, s.1). Simpson's wages could not be considered unreasonable given this minimum and the fact that she was looking after two children. (In using the term "reasonable" I am of course stating the amount claimed was not excessive, but from a nanny's standpoint or a day care educator, the wages are, in about every situation, not really adequate.)

Child Care Expenses-section 63 of the Act:

Prior to 1972, child care expenses were treated as non-deductible personal expenses for income tax purposes. In 1972, as part of a tax reform package, Parliament addressed the question of providing a statutory scheme in the Act for the deductibility of child care expenses by enacting section 63 of the Act. The purpose of passing section 63 was to facilitate the entry of women into the labour force, thereby promoting economic equality between the sexes as well as providing relief for low income families. (White Paper on Tax Reform, (1969)).

Initially, it was considered that the main responsibility for child care rested with the mother, and therefore the child care deduction was only available to women (unless it could be shown that the mother, because of illness or imprisonment, was unable to care for the child or children). However, in response to the ruling of the Canadian Human Rights Tribunal in Bailey et al v. M.N.R. (1980), 1 C.H.R.R. 193, section 63 was amended, with respect to the 1983 and subsequent taxation years, so that it applied equally to male and female taxpayers. Section 63, as it read in 1985, allowed a taxpayer to deduct from earnings up to $2,000 per child (maximum of four children) in respect of child care expenses for the year. Where expenses were incurred by a couple, the person with the lower income had to claim the deduction.

Interpretation of subsection 15(1) of the Charter:

The plaintiff relies upon this subsection which provides as follows:

15.(1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

In effect, the plaintiff's case was made on the basis of a denial of equal benefit of the law. This section was not proclaimed in force until April 17, 1985. The case law is consistent on that point that subsection 15(1) of the Charter does not have retrospective effect.

In R. v. Seo (1986), 54 O.R. (2d) 293; 25 C.C.C.(3d) 385, the Ontario Court of Appeal noted that it was apparent that the reason for postponing the implementation of section 15 was to provide an opportunity to Parliament and the Legislatures to bring their legislation into compliance with the Charter. It is only after this transition period that the legislation could be challenged on the grounds that this section was infringed. Thus it was not open to the accused in that case to challenge the validity of a conviction under section 234.1 of the Criminal Code on the basis that the failure to proclaim the section in force throughout Canada created an inequality, where the charge arose out of an occurrence in 1983.

Similarly here, the Charter defence cannot be invoked for the taxation years 1982, 1983, 1984 and the first three and a half months of 1985. The notices of reassessment mailed after April 17, 1985 do not have the effect, as alleged by the plaintiff, of making the Charter applicable to those years. However, the plaintiff is entitled to invoke the Charter for the balance of the taxation year 1985 and subsequent taxation years.

The most recent judicial pronouncement on the subject of section 15 of the Charter is found in Law Society of British Columbia v. Andrews, [1989] 2 W.W.R. 289; 91 N.R. 255. The questions before the Court were whether the Canadian citizenship requirement for admission to the British Columbia bar infringed or denied the equality rights guaranteed by subsection 15(1) of the Charter, and if so, was the infringement justified under section 1 of the Charter. The Court unanimously found that this requirement infringed subsection 15(1) and a majority held it was not sustainable under section 1 of the Charter. Although the decision is not on point it is of interest for its comments on subsection 15(1) and the interaction of sections 1 and 15(1) of the Charter. What is noteworthy at the outset is the fact that the Supreme Court of Canada rejected the “similarly situated test", namely that similar people be treated similarly and those who are differently situated be treated differently and instead chose the "enumerated or analogous” grounds test to determine whether individuals have been discriminated against on the basis of the grounds outlined in subsection 15(1) of the Charter.

McIntyre, J., writing for the Court on the question of subsection 15(1) and the interaction of subsection 15(1) and section 1, first considered the concept of equality and noted at page 7 that subsection 15(1) provides for every individual a guarantee of equality before and under the law, as well as equal protection and equal benefit of the law without discrimination. "This is nota general guarantee of equality, its focus is on the application of the law" (emphasis added).

In the case before me there is no problem with the word "law" because I am dealing with an Act of Parliament. With respect to the concept of equality, McIntyre, J. also noted the following at page 9:

. . . To approach the ideal of full equality before and under the law - and in human affairs an approach is all that can be expected—the main consideration must be the impact of the law on the individual or the group concerned. Recognizing that there will always be an infinite variety of personal characteristics, capacities, entitlements and merits among those subject to a law, there must be accorded, as nearly as may be possible, an equality of benefit and protection and no more of the restrictions, penalties or burdens imposed upon one than another. In other words, the admittedly unattainable ideal should be that a law expressed to bind all should not because of irrelevant personal differences have a more burdensome or less beneficial impact on one than another.

McIntyre, J. went on to consider the similarly situated test and found at page 12 that the test cannot be accepted as a fixed rule or formula for the resolution of equality questions arising under the Charter:

Consideration must be given to the content of the law, to its purpose, and its impact upon those to whom it applies, and also upon those whom it excludes from its application. The issues which will arise from case to case are such that it would be wrong to attempt to confine these considerations within such a fixed and limited formula.

At page 19 he described discrimination in the following terms:

I would say then that discrimination may be described as a distinction, whether intentional or not but based on grounds relating to personal characteristics of the individual or group, which has the effect of imposing burdens, obligations, or disadvantages on such individual or group not imposed upon others, or which withholds or limits access to opportunities, benefits, and advantages available to other members of society. Distinctions based on personal characteristics attributed to an individual solely on the basis of association with a group will rarely escape the charge of discrimination, while those based on an individual's merits and capacities will rarely be so classed.

Of course the Court must address the issue of discrimination as the term is used in subsection 15(1). McIntyre, J. added at pages 19 & 20:

The enumerated grounds in s. 15(1) are not exclusive and the limits, if any, on grounds for discrimination which may be established in future cases await definition. The enumerated grounds do, however, reflect the most common and probably the most socially destructive and historically practised bases of discrimination and must, in the words of s. 15(1), receive particular attention. Both the enumerated grounds themselves and other possible grounds of discrimination recognized under s. 15(1) must be interpreted in a broad and generous manner, reflecting the fact that they are constitutional provisions not easily repealed or amended but intended to provide a “continuing framework for the legitimate exercise of governmental power" and, at the same time, for the “unremitting protection" of equality rights: see Hunter v. Southam Inc., [1984] 2 S.C.R. 145, at p. 155.

McIntyre, J. examined the three main approaches Courts have taken in determining the role of subsection 15(1) of the Charter, the meaning of discrimination set out in this section and the relationship of subsection 15(1) and section 1 of the Charter and found that the "enumerated and analogous approach most closely accorded with the purposes of section 15 and the definition of discrimination and leaves questions of justification to section 1". (page 26) At page 25 of his reasons McIntyre, J. included the following quote from Hugessen, J.A. in Smith, Kline & French Laboratories v. Canada, [1987] 2 F.C. 359 (C.A.) at pages 368-369:

As far as the text of section 15 itself is concerned, one may look to whether or not there is “discrimination”, in the pejorative sense of that word, and as to whether the categories are based upon the grounds enumerated or grounds analogous to them. The inquiry, in effect, concentrates upon the personal characteristics of those who claim to have been unequally treated. Questions of stereotyping, of historical disadvantagement, in a word, of prejudice, are the focus and there may even be a recognition that for some people equality has a different meaning than for others.

McIntyre, J. then continued with the following commentary at pages 26 and 27:

However, in assessing whether a complainant's rights have been infringed under s. 15(1), it is not enough to focus only on the alleged ground of discrimination and decide whether or not it is an enumerated or analogous ground. The effect of the impugned distinction or classification on the complainant must be considered. Once it is accepted that not all distinctions and differentiations created by law are discriminatory, then a role must be assigned to s. 15(1) which goes beyond the mere recognition of a legal distinction. A complainant under s. 15(1) must show not only that he or she is not receiving equal treatment before and under the law or that the law has a differential impact on him or her in the protection or benefit accorded by law but, in addition, must show that the legislative impact of the law is discriminatory.

[Emphasis added.]

Thus, the determination of a possible infringement involves a two-step process: first, the person alleging a subsection 15(1) breach will have to demonstrate unequal treatment before or under the law and second, the person will have to show that the impact of the law is discriminatory. Further, McIntyre, J. stated at page 27:

Where discrimination is found a breach of s. 15(1) has occurred and—where s. 15(2) is not applicable—any justification, any consideration of the reasonableness of the enactment; indeed, any consideration of factors which could justify the discrimination and support the constitutionality of the impugned enactment would take place under s.1. This approach would conform with the directions of this Court in earlier decisions concerning the application of s.1 and at the same time would allow for the screening out of the obviously trivial and vexatious claim. In this, it would provide a workable approach to the problem.

The above distinction is important (as McIntyre, J. noted) because it is for the taxpayer in the case before me to establish that her Charter right has been infringed and if so, for the State to justify the infringement.

The different treatment involved in the case before me is the refusal by the M.N.R. to allow the plaintiff to deduct her child care expenses (namely Simpson's salary) as a business expense for the taxation years in question. The plaintiff is earning a business income and in keeping with sound business sense or practice, the plaintiff hired a nanny so that she (the plaintiff) could generate income. Thus by refusing the plaintiff her deduction, the M.N.R. is treating her differently from other taxpayers with expenses that are considered necessary to generate business income.

A secondary aspect of this different treatment is that the M.N.R. is applying to the plaintiff principles developed in the case law dealing with deductibility of business expenses as they relate to child care, but the application to this particular plaintiff of those old principles has a different impact on her (page 413 of the transcript). As counsel for the plaintiff noted, the plaintiff is not treated like a serious business person with a serious expense incurred for a legitimate purpose. Instead she is treated “like some frivolous person hiring a maid or going for a manicure, and it is that treatment that offends the guarantee against unequal treatment and differential impact”, (page 414 of the transcript).

The plaintiff must pay more tax than she would otherwise pay if she were allowed a deduction, which is also an inequity that affects her. Further, she is required to make all the deductions for her employee, Simpson, i.e., to deduct tax at source, UI and CPP; and to pay employer UI and CPP contributions. In this regard she is treated like any employer who is incurring a business expense but yet she is not allowed to deduct that expense. Therefore, she not only has the extra tax but she has the extra paper burden as well as the extra responsibilities. The plaintiff maintains that it is clear that a distinction is being made between the treatment that she receives and that of other employers, and the distinction is based on grounds relating to personal characteristics of this plaintiff, namely that she is a woman and a parent. In support of the first distinction claimed, the plaintiff refers to Armstrong's evidence that women bear by far the largest burden of child care. It is women entering the work force with these child care responsibilities who are affected by this kind of distinction.

The second aspect of the personal characteristic argument is that the plaintiff is a parent. It is clear that Courts are willing to consider characteristics or categories other than those listed in section 15 of the Charter in dealing with an issue of discrimination under section 15. In Andrews, supra, the Supreme Court indicated a willingness to take its cue in determining what type of personal characteristics are an unconstitutional basis for difference from Human Rights legislation. Armstrong's evidence showed that the sex of the person who is worked for and discrimination on the basis of family status, while not universal in Canada, is also a ground of discrimination noted in several Human Rights Codes in Canada.

Therefore, I agree with the plaintiff's counsel that there is a distinction in this particular case and discrimination against the plaintiff, in respect of personal characteristics such as sex and parental status and this has the effect of imposing on her burdens, obligations and disadvantages not imposed upon others.

The plaintiff has the financial burden of paying for almost all of her child care expenses (given the section 63 allowance) from after-tax dollars. This is a financial burden, yet it is not imposed with respect to other kinds of business expenses and according to the M.N.R. is not a financial burden imposed on employers who offer child care service to their employees. Thus the plaintiff must bear the financial burden of this expense in a way that other generators of business income need not. She must also bear the same paper burden as other employers do, namely filling out all the forms, making remittances and paying the CPP and UI premiums levied against employers.

With respect to the second part of the discrimination test, the limitations imposed on the plaintiff withhold or limit access to the opportunities, benefits and advantages available to other members of society. As indicated earlier, the plaintiff is denied the benefit of a tax deduction which other people who have these burdens receive. She pays the money and fulfils the administrative requirements, whereas other employers do not have to pay the money in after-tax dollars and receive the benefit of the deduction (page 419 of the transcript).

I think it would be appropriate at this point to note the very purpose of section 15 of the Charter as stated by McIntyre, J. at page 15 of his reasons in Andrews:

It is clear that the purpose of s. 15 is to ensure equality in the formulation and application of the law. The promotion of equality entails the promotion of a society in which all are secure in the knowledge that they are recognized at law as human beings equally deserving of concern, respect and consideration. It has a large remedial component.

Therefore, I am of the opinion that if in our society we are to promote the equality of women, as clearly intended by section 15, then an interpretation of the Income Tax Act which allows women entrepreneurs (in the proper circumstances) to deduct their child care expenses to permit them to pursue a business, is clearly in order.

The defendant maintains that whether something is or is not a business deduction in respect of the fundamental concepts of income determination, is not a distinction that is discriminatory on any of the enumerated grounds outlined in section 15 or analogous grounds. The defendant further submits that the distinction of what is the “business circle” has nothing to do with personal characteristics. It has to do with the answer to the questions: “has it occurrred in the course of carrying on the business?” Thus the distinction is not pejorative, it is a distinction on economic commercial practices in regard to what constitutes a business deduction. In essence the argument is that the provisions of the Act regarding profit are "neutral on their face”. They apply to everyone equally whether the taxpayer is claiming nanny expenses or conference expenses. Therefore they are not discriminatory within the meaning of section 15 of the Charter. Further, the so-called "burdern" of higher taxes and the paper burden of making deductions, remittances and payments are imposed on all Canadians in business, and in this sense the plaintiff cannot be said to be discriminated against.

In dealing with the defendant's submissions, I would refer once again to the Supreme Court of Canada’s decision in Andrews, which stressed the impact of the law on the individual or group concerned. Thus a statute which is neutral on its face can be held to be contrary to section 15 of the Charter if, in its application, it imposes additional burdens on one class or withholds from them benefits available to others. I am satisfied that in the case before me, the plaintiff has, on the basis of Andrews, established the differential impact of the law, as well as the requisite discrimination based on her personal characteristics of sex and family or parental status.

The defendant has also submitted that Parliament, by enacting section 63 of the Income Tax Act has specifically allowed the child care deductions subject to statutory conditions. In so doing, it has properly exercised its legislative function in the social-economic field and has not infringed any of the plaintiff's section 15 rights. Instead the section (section 63) is a subsidiary section, and according to the defendant, it addresses the problem of child care and helps it out. However, Armstrong's evidence seems to indicate that something is "wrong" and that according to government reports, the present system is not delivering child care in sufficient quantities for Canadian women. The cost of child care takes up a considerable portion of women's income (approximately one-fifth) and is considered a high price item. As a high price item it constitutes a barrier to women's access to the economy.

Therefore, I agree with the plaintiff's submission that in light of Andrews, an interpretation of the Income Tax Act which ignores the realities that women bear a major responsibility for child rearing and that the costs of child care are a major barrier to women's participation, would itself violate section 15 of the Charter. Moreover, since the Andrews decision, the Act cannot be interpreted as if parents (mostly female) are the same as other workers, or entrepreneurs (i. e. without child care responsibilities); it must be interpreted in a way which recognizes their specific experience as principally responsible for child care.

Justification under Section 1 of the Charter:

The third step involved in a section 15 claim is the determination of whether the infringement is justified by section 1 of the Charter. As I indicated earlier, the onus of justifying the infringement is on the party seeking to uphold the provision, in this case the defendant Crown. Further, the justification would have to be done in accordance with the test outlined in the case of R. v. Oakes, [1986] 1 S.C.R. 103; 24 C.C.C. (3d) 321.

The defendant submits that denying the deduction of nanny expenses is justified under section 1 of the Charter when viewed in the context of Parliament's total fiscal responsibilities, its actions done to-date and the amounts expended. The defendant further submits that Courts should not be called upon to substitute judicial opinion for legislative ones as to the place in which to draw precise lines for the allocation of limited public funds and tax expenditures. The defendant relies on McIntyre, J.'s reasons in Andrews (pages 29-30) as support for these submissions.

However, it should be noted that with respect to the portion of the reasons referred to by the defendant, McIntyre, J. was in the minority of the Court. Wilson, J. (with whom the Chief Justice, Lamer and L'Heureux- Dubé, JJ. agree) disagreed with McIntyre, J. regarding the deference which is to be given to legislative choice. At pages 5 and 6 of her reasons, Wilson, J. describes the approach to section 1 in the following terms:

The first hurdle to be crossed in order to override a right guaranteed in the Charter is that the objective sought to be achieved by the impugned law must relate to concerns which are "pressing and substantial” in a free and democratic society. The chief Justice stated at pp. 138-39:

To establish that a limit is reasonable and demonstrably justified in a free and democratic society, two central criteria must be satisfied. First, the objective, which the measures responsible for a limit on a Charter right or freedom are designed to serve, must be “of sufficient importance to warrant overriding a constitutionally protected right or freedom": R. v. Big M Drug Mart Ltd., supra, at p. 352. The standard must be high in order to ensure that objectives which are trivial or discordant with the principles integral to a free and democratic society do not gain s.1 protection. It is necessary, at a minimum, that an objective relate to concerns which are pressing and substantial in a free and democratic society before it can be characterized as sufficiently important.

This, in my view, remains an appropriate standard when it is recognized that not every distinction between individuals and groups will violate s. 15. If every distinction between individuals and groups gave rise to a violation of s. 15, then this standard might well be too stringent for application in all cases and might deny the community at large the benefits associated with sound and desirable social and economic legislation. This is not a concern, however, once the position that every distinction drawn by law constitutes discrimination is rejected as indeed it is in the judgment of my colleague, McIntyre J. Given that s. 15 is designed to protect those groups who suffer social, political and legal disadvantage in our society, the burden resting on government to justify the type of discrimination against such groups is appropriately an onerous one.

The second step in a s. 1 inquiry involves the application of a proportionality test which requires the Court to balance a number of factors. The Court must consider the nature of the right, the extent of its infringement, and the degree to which the limitation furthers the attainment of the legitimate goal reflected in the legislation. As the Chief Justice stated in R. v. Edwards Books and Art Ltd., [1986] 2 S.C.R. 713, at p. 768:

Second, the means chosen to attain those objectives must be proportional or appropriate to the ends. The proportionality requirement, in turn, normally has three aspects: the limiting measures must be carefully designed, or rationally connected, to the objective; they must impair the right as little as possible; and their effects must not be so severely trench on individual or group rights that the legislative objective, albeit important, is nevertheless outweighed by the abridgment of rights.

Therefore, it is clear from the Andrews decision that it is no longer possible to justify a differential burden (withholding a benefit) merely because it is done pursuant to a valid federal objective. This latter test has been replaced by the test of justifiability included in section 1 and interpreted in the Oakes case. Thus the objective of a law which violates the Charter must be "pressing and substantial" in order to pass scrutiny under section 1.

After reviewing the evidence presented by the defendant, it is my opinion that the defendant has offered no "pressing and substantial” objective to justify deductibility as a business expense of the plaintiff's nanny costs.

Further, on the facts of this particular case, it has not been established that Parliament has made a legislative choice against full deductibility of nanny expenses in this case. Instead, the Courts are left to decide, in accordance with the Charter, whether the concepts of profit and business expenses permit such a deduction. This is not to say that nanny expenses will always be treated as a business expense, or that section 63 of the Act has been invalidated under section 52 of the Charter.

The defendant has argued that I have been asked to "read in” some provision of the Income Tax Act to bring it into conformity with the Charter; to amend the definition of profit in the Act (which is within the purview of judicial interpretation) or to strike down section 63 of the Act. This is not so. The meaning to be given to the term "profit", as I indicated earlier, is a matter for judicial interpretation. Statutory interpretation has traditionally been seen as the proper preserve of the Courts, within and without a constitutional context. Therefore, it is open to me to give the term "profit" as it relates to allowable business expenses (section 9 and section 18 of the Act), an interpretation which is consistent with the requirements of the Charter, without “deleting”, "amending" or “reading in”.

For the reasons I have outlined above the plaintiff is allowed to deduct the cost of her nanny (the nanny's salary) as a business expense, pursuant to the relevant provisions of the Income Tax Act, for the following taxation years, namely 1982, 1983, 1984 and 1985.

Also, in keeping with the Charter intent to promote equality as well as the new social and economic realities of Canada, the plaintiff should be allowed to deduct the cost of her nanny (the nanny's salary) as a business expense in the 1985 and subsequent taxation years.

Appeal allowed.