D'Amours v. MNR, 90 DTC 1827, [1990] 2 CTC 2355 (TCC)

Lamarre Proulx, T.C.J. [Translation]:—This is an appeal against a reassessment by the respondent, the Minister of National Revenue, with respect to the 1985 taxation year.

The issue is whether the child care expenses incurred during a period of maternity leave are deductible under clause 63(3)(a)(i)(A) of the Income Tax Act (the 'Act"). As it applied to 1985 this provision read as follows:

63. (3) (a) “child care expense" means an expense incurred for the purpose of providing in Canada, for any eligible child of a taxpayer, child care services including baby sitting services, day nursery services or lodging at a boarding school or camp if the services were provided

(i) to enable the taxpayer, or the supporting person of the child for the year, who resided with the child at the time the expense was incurred,

(A) to perform the duties of an office or employment.

The appellant's husband acted as her agent in this case and the facts were not in dispute.

The appellant is a dental hygienist employed by the CLSC [1] in Paspébiac. In late October 1984, when she was pregnant with her fourth child, she was allowed to leave her work as a preventive measure. The child was born on November 29, 1984. Under the collective agreement that applied to her the appellant continued to receive 95 per cent of her salary in accordance with the following formula: the employee received the benefits to which she was entitled under the unemployment insurance scheme and the employer made up the difference.

The appellant employed a babysitter in 1984 and kept this babysitter in her employ in the first four months of 1985. Between May and August the babysitter agreed temporarily to stop working for the appellant and began again in September, at which time the appellant returned to the duties of her employment. It is the expenses incurred for the services performed by this babysitter in the first four months of 1985 that are the subject of the dispute.

The respondent refused the deduction on the ground that the expenses were not incurred to enable the appellant to perform the duties of an office or employment, as required by the provision quoted earlier. The appellant's agent argued that the appellant was not unemployed or looking for work, that maternity leave was a benefit relating to employment and that the child care expenses were to be set off against earned income as defined in paragraph 63(3)(b) of the Act, which does not include benefits received under the Unemployment Insurance Act, 1971 [2] but includes such benefits as those described in paragraph 6(1)(f) of the Act that are paid pursuant to a sickness or accident insurance plan, a disability insurance plan or an income maintenance insurance plan. (The evidence did not show whether the payments made by the employer came from such a scheme. In any event, they were treated as earned income.)

Paragraph 63(3)(b) of the Act reads as follows:

63. (3) (b) "earned income" of a taxpayer means the aggregate of

(i) all salaries, wages and other remuneration, including gratuities received by him in respect of, in the course of, or by virtue of offices and employments, and all amounts included in computing his income by virtue of sections 6 and 7,

(ii) amounts included in computing his income by virtue of paragraph 56(1)(m), (n) or (o), and

(iii) his incomes from all businesses carried on either alone or as a partner actively engaged in the business.

After mature reflection I feel that the appellant's argument is correct in law for the following reasons:

(1) the babysitter was employed by the appellant prior to the maternity leave, (2) during the period in dispute the appellant kept her employment, and (3) the definition of earned income includes the sums received by the appellant from her employer during her maternity leave.

I shall consider each point in turn:

(1) Since the babysitter was employed prior to the maternity leave, I accept the argument that she was employed for the purpose of enabling the appellant to perform her duties and not for strictly personal reasons. These were costs that the appellant had to continue to pay during her leave in order to ensure that the babysitter was still available when she returned to work. My decision would have been different if, for example, the services paid for were those of a casual employee who did not have to be kept in the appellant's employ during the maternity leave to ensure that she would be available when the appellant returned to work. In my judgment, these expenses would not then be covered by clause 63(3)(a)(i)(A) but would be expenses incurred for strictly personal reasons.

(2) The appellant kept her employment; it is a requirement of the provision in question that the taxpayer have an office or employment. The cost of child care must be incurred to enable the taxpayer to perform the duties of an office or employment.

(3) If Parliament had wished to limit the application of this right to the period in which the person is physically at work, why would it have included in the definition of earned income certain sources of income other than earnings and gratuities such as, for example, the benefits described in paragraph 6(1)(f)? Parliament could have limited the definition of earned income to wages, salaries and other remuneration, including gratuities, received by the person in respect of, in the course of or by virtue of offices and employments. If the respondent's reasoning is taken to the limit, Parliament could even have excluded income earned during vacations from the definition of earned income. I am forced to conclude, therefore, that Parliament did not rule out situations where the person receives benefits in respect of, in the course of or by virtue of employment that he still holds, without being physically present at the work place, to the extent that the expenses claimed were incurred to perform the duties of the employment.

In a case such as this we must analyze the child care expenses claimed and determine whether they were related to the employment. I have concluded that the expenses claimed in this appeal were incurred to enable the appellant to perform the duties of her employment.

Counsel for the respondent raised the question of the interpretation to be given to the provisions of the Act. In this regard I should quote from the decision of Dickson, C.J. of the Supreme Court of Canada in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32; [1987] 1 C.T.C. 117; 87 D.T.C. 5059, at page 128 (D.T.C. 5066-67; S.C.R. 52-53)? [3]

I acknowledge, however, that just as there has been a recent trend away from strict construction of taxation statutes . . ., so too has the recent trend in tax cases been towards attempting to ascertain the true commercial and practical nature of the taxpayer's transactions.

This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of taxpayers' transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon the taxpayer's sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.

I believe that if I allow the deduction claimed by the appellant, I am taking into account the economic realities facing a parent who employs a babysitter, and I feel that my interpretation is consistent with both the wording and the object of the tax legislation.

The object of this legislation is, without any doubt, to enable parents who work to deduct child care expenses. It may happen that parents are unable to dismiss a babysitter or interrupt day care services not merely for personal reasons but because of economic reality. If a babysitter is dismissed, there may be little chance that she can be rehired at the end of the maternity leave. If a child is removed from day care, it may lose its priority on the waiting list and it may not be possible to have it re-admitted to the day care at the desired time. This does not create the desirable permanence and quality of care for children that working parents need to enable them to perform their own jobs. In the circumstances, these expenses were not incurred for personal purposes but for purposes of employment.

The appeal is allowed without costs.

Appeal allowed.