McLelan v. The Queen, 95 DTC 856, [1995] 1 CTC 2673 (TCC)

O’Connor J.T.C.C.:-This appeal was heard in Edmonton, Alberta on October 4, 1994 pursuant to the informal procedure of this Court.

The sole issue in this appeal is whether, for the 1992 taxation year, the appellant was entitled to deduct, under section 63 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act"), child care expenses in an amount of $2,273 for a nanny retained by the appellant from August 2, 1992 to October 10, 1992.

The relevant facts are as follows:

A. During the 1992 taxation year, the appellant was a constable for the RCMP for the following periods:

January 1, 1992 to April 3, 1992

October 12, 1992 to December 31, 1992

B. During the 1992 taxation year the appellant paid expenses in respect of child care services for the following periods:

January 1, 1992 to March 27, 1992

August 1, 1992 to December 31, 1992

C. The appellant’s permitted maternity leave was 26 weeks to which are to be added seven days representing part of the appellant’s permitted “annual leave." This resulted in the appellant being on permitted leave from April 4, 1992 to October 10, 1992.

D. During the first 15 weeks of this leave, the appellant was entitled to and did receive unemployment insurance payments which were supplemented by the employer to such an extent that she received 90 per cent of her salary. The employer also paid an additional two weeks. Consequently, the appellant was remunerated for 17 weeks, which expired August 1, 1992.

E. Although her maternity leave continued from August 2, 1992 to October 10, 1992 (she returned to work on October 11, 1992) she did not, during that period, receive any employment income or unemployment insurance benefits.

F. At the end of the 17-week pay period mentioned above, due to trauma and stress as a result of the caesarean birth of her third son on April 18, 1992 and related complications, the appellant decided that she was not yet able to return to the stresses of her work as a police officer. She decided, on the advice of her doctor, to exhaust her permitted leave to October 10, 1992 and to retain a nanny to assist with the child care (three boys under age six) and thus enable her to be mentally fit to return to work on October 11, 1992.

G. The appellant incurred expenses in respect of a nanny in the amount of $2,273 during the period from August 2, 1992 to October 10, 1992.

H. During said period August 2, 1992 to October 10, 1992, the appellant did not work but rather spent the time or part of the time recuperating and preparing to return to work on October 11, 1992.

I. The appellant testified that although she may not have required the nanny for the entire period August 2, 1992 to October 10, 1992, it was very difficult to find a good nanny for her three young sons. This normal difficulty was exacerbated because the appellant’s home was in a remote suburb with limited bus service. Consequently, when a highly qualified nanny became available, she hired her immediately for fear of losing her and not being able later to find a good nanny.

J. Prior to leaving on her maternity leave, the appellant signed a document with her employer (Exhibit A-4) entitled maternity allowance agreement, the format of which reads as follows:

1. This agreement between and the Royal Canadian Mounted Police on behalf of Treasury Board of Canada, the employer for this purpose, is made pursuant to the Royal Canadian Mounted Police maternity allowance, approved by the Treasury Board of Canada on December 11, 1984, TBC 796232, and as amended by Treasury Board of Canada on July 24, 1985, TBC 798874.

2. I undertake to return to work on , or such later date as may be approved by RCMP management, and remain in the RCMP’s employ and to work for at least six months from that date, less any period in respect of which I may be granted leave with pay.

3. I understand that failure on my part to return to work on the date specified in paragraph 2 above and my failure to remain for at least six months in the RCMP’s employ from that date will make me indebted to the employer for the full amount received as maternity allowance and I will repay such amount at such time and subject to such terms as the employer may prescribe.

H. The appellant’s rate of pay as an officer of the RCMP was established on an annual basis and the terms of her employment allowed for the maternity leave and annual leave mentioned above.

The law

Subsection 63(1) permits a taxpayer to deduct child care expenses in computing his or her income subject to certain conditions and limitations. Clause 63(3)(a)(i)(A) reads as follows:

63(3) In this section,

(a) "child care expense" means an expense incurred in a taxation year for the purpose of providing in Canada, for an eligible child of a taxpayer, child care services including baby sitting services...if the services were provided

(i) to enable the taxpayer...

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

The term "earned income" in subparagraph 63(l)(e)(i) is defined in paragraph 63(3)(b) to mean

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) ...and

(iii) his incomes from all businesses carried on either alone or...

The Court was referred to the case of McCluskie v. The Queen, [1994] 1 C.T.C. 2401, 94 D.T.C. 1735, the headnote of which reads as follows at page 2401 (D.T.C. 1735):

The issue was the deductibility of child care expenses under section 63. The taxpayer’s babysitter arrived from abroad in July 1991 while the taxpayer was on maternity leave. The taxpayer did not return to work until August 23, 1991 but she did not want to risk losing the babysitter, so she hired her in July. The Minister reduced the child care expenses by $1,260 because this amount was paid with respect to a period when the taxpayer was not performing the duties of an office or employment.

Appeal allowed in part. Notwithstanding that a taxpayer is not entitled to a deduction while she is not performing her duties of employment, a period of orientation between the taxpayer, her children and the newly hired babysitter was necessary. Accordingly, the court allowed the costs for the seven days immediately preceding the taxpayer returning to work.

The words of Rip J. in McCluskie are relevant at page 2406 (D.T.C. 1739).

To my mind the words "to perform the duties of an office or employment' and "de remplir les fonctions d’une charge ou d’une emploi” in paragraph 63(3)(a) means that the child care expense must be incurred to enable the taxpayer to execute or perform the job for which she was hired. If the taxpayer is not performing her duties of employment (or office) during the period for which the expense is incurred it may be argued by definition, she has not incurred a child care expense.

Now there may be times when a parent will be permitted a child care deduction with respect to a period she or he is not physically present at the work place. The parent may be on sick leave, for example. To dismiss the babysitter on such occasion would be disruptive. The child care deduction may also be available to permit the parents, the children and a newly hired babysitter a period of time to get oriented with, and familiar to, each other. It is not acceptable from a welfare point of view, for example, for a newly hired babysitter to arrive at the taxpayer’s door step early Monday morning, when the parents leave for work, to start providing services without prior introduction and some preparation. I cannot imagine that the costs incurred during such periods were not contemplated by Parliament as a child care expense. To include babysitting expenses incurred during such periods as a child care expense is within the "object and spirit" of section 63. However the lengths of leave and orientation would have to be reasonable, depending on circumstances, and not remote from the time the taxpayer continues to perform his or her occupation.

[Emphasis added. ]

Rip J. went on to give examples but these do not square with the peculiar facts in this case.

In the case of D’Amours v. M.N.R., [1990] 2 C.T.C. 2355, 90 D.T.C. 1827 (T.C.C.) the headnote reads as follows at page 2356 (D.T.C. 1827):

In October 1984, the taxpayer, a dental hygienist, was pregnant and was thus permitted to leave work as a preventive measure. Under the terms of her collective agreement, she began to receive from her employer an amount which, when added to the benefits receivable by her under the prevailing unemployment insurance legislation, enabled her to continue to receive 95 per cent of her former salary. During 1984, and for the first four months of 1985, the taxpayer employed a babysitter who agreed to stop working for her from May until August 1985. In September 1985, the babysitter recommenced employment with the taxpayer, at which time the taxpayer herself returned to work. The Minister disallowed the deduction by her of the expenses incurred for the services of the babysitter during the first four months of 1985. The taxpayer appealed to the Tax Court of Canada.

The taxpayer’s appeal was allowed. The babysitter had been employed prior to the taxpayer’s maternity leave, the taxpayer retained her employment throughout such leave, and to ensure that the babysitter would be available when she returned to work, the taxpayer had to retain her services during the four-month period in question. The expenses, therefore, were not incurred for personal reasons, but to enable the taxpayer to perform the duties of an office or employment, and hence fell within the definition of "child care expenses" in clause 63(3)(a)(i)(A) of the Act. Furthermore, the combined amounts being received by the taxpayer from the unemployment insurance authorities and from her employer during the period in issue constituted "earned income" within the meaning of paragraph 63(3)(b) of the Act. The expenses incurred during that period therefore met the criteria for deduction as "child care expenses". The Minister was ordered to reassess accordingly.

Analysis

Considering:

1. that the appellant’s rate of salary was fixed on an annual basis;

2. that the terms of her contract of employment contemplated maternity leave and annual leave;

3. that during these periods of leave, she was still an employee of the RCMP notwithstanding that no remuneration was received for the period August 2, 1992 to October 10, 1992;

4. that the appellant, for medical reasons related to stress as explained above, was unable to return to work at the end of the pay period;

5. that on the advice of her doctor, she hired the nanny so that she would be able to resume her duties on the day that her leave ended;

6. as established in D’Amours and in McCluskie, it is not essential that the nanny expenses be incurred during the period of actual physical employment;

7. although the appellant may not have required the nanny for the entire period, owing to market conditions relative to securing a good nanny, especially in her residential area, she felt that it was the most prudent thing to do to hire the nanny in question as soon as the nanny was available;

8. that it was a condition of her maternity leave that she sign the agreement (Exhibit A-4) which obliged her to return to work and work for a further six months at the end of the leave.

The Court believes that the appellant, in this most unusual set of circumstances does meet the conditions of section 63 and consequently, the appeal is allowed without costs.

Appeal allowed.