Date: 19991220
Docket: 98-2581-IT-I; 98-2555-IT-I
BETWEEN:
MARILYN D. SLAWINSKY and
M. SLAWINSKY PROFESSIONAL CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
[1] The appeals were heard on common evidence.
ISSUES:
[2] The issue with respect to M. Slawinsky Professional
Corporation ("the Corporation") is whether the
Corporation can, for income tax purposes, deduct an amount equal
to wages paid for "nanny" services in respect of the
child of Marilyn D. Slawinsky ("Slawinsky"), an
employee of the Corporation, enabling her to be free from child
care duties and to earn income for the Corporation for its 1995
and 1996 taxation years.
[3] The issues with respect to Slawinsky are:
(a) whether Slawinsky received a benefit from the Corporation
pursuant to the provisions of the Income Tax Act
("Act")[1] in respect of such payments for her 1994 and 1995
taxation years;
(b) if so, whether the benefit was provided by the Corporation
to Slawinsky in her capacity as a shareholder under section 15 or
as an employee under section 6; and
(c) if so, whether the Minister of National Revenue
("Minister") correctly assessed the value of the
benefit.
[4] A sub-issue relates to the Corporation's 1994 taxation
year. The disallowance of the sum of $7,203 to the Corporation,
in respect of such expenses for its 1994 taxation year, reduced
its amount of loss otherwise incurred in that year that could be
carried forward to its 1995 year. The parties are agreed that if
the Corporation succeeds in its appeal, the 1994 loss will be
increased by this amount. A discussion of this arose during the
hearing because the assessment for the Corporation's 1994
year was a nil assessment from which no appeal could be brought.
The Corporation applied for a Notice of Determination of Loss for
that year. Correspondence from Revenue Canada indicated that such
computation could not be made because the appropriate documents
had been forwarded to the Department of Justice for the conduct
of this case. The resolution of this matter will follow the
decision in this case.
FACTS:
[5] The Corporation's fiscal and taxation year end was
January 31 in each year. Slawinsky was the sole shareholder of
the Corporation which was incorporated to and did provide legal
services. For all material purposes Slawinsky, a lawyer, was the
sole shareholder and only lawyer employee of the Corporation. It
paid wages to nannies who cared for Slawinsky's child[2]
[6] The Minister of National Revenue ("Minister")
reassessed the Corporation disallowing amounts paid to the
nannies of $15,340 and $15,740 for its 1995 and 1996 taxation
years. The Minister also reassessed Slawinsky adding those
amounts to her 1994 and 1995 taxation years. On objection by
Slawinsky, the Minister reassessed to allow child care expenses
of $5,000 for each of the 1994 and 1995 taxation years.
[7] Slawinsky testified that the main areas of the
Corporation's practice were litigation, primarily in divorce
and personal injury and, subsequent to the years under review,
divorce and family law. She stated that the primary source of
profits of the Corporation was fees for legal services rendered
based on an hourly rate for services provided by Slawinsky. She
said that her child was born on March 6, 1993 at which time she
was not married and was not living with anyone. She stated that
her son lived full-time with her during the period and that she
had essentially the full obligation and responsibility to provide
for him.
[8] She testified that she provided legal services for the
Corporation at irregular hours because she did a great deal of
court work. She stated that personal injury work and divorce work
with custody matters necessitated services
...in the middle of the night, on week-ends and so on.
Restraining orders have to be done on very short notice and so
on.
[9] Slawinsky stated also that she was involved in legal
actions in nearly all the judicial districts of Alberta and
routinely in Edmonton, Calgary, Drumheller, Wetaskiwin,
Lethbridge, et cetera. She testified further that she went
regularly to legal education seminars outside Red Deer and
regularly ended up working late at night, often without knowing
in advance that she would be required to do so. She said that
sometimes she would be tied up in court and that other
emergencies would arise such as her being served with a Notice of
Application to be heard the next day. She stated that she worked
evenings and week-ends when required. She said also that,
It's very critical to the business that the corporation
carries on that I am available to clients for that type of
service.
[10] She also testified that when the child was born, day-care
institutions would not take infants under the age of two. She
also said that if a child was sick, other arrangements had to be
made. She said that the institutions had limited hours of work
and that children had to be picked up by a certain time and
dropped off by a certain time. She stated further that quite
frequently the institutional services were not available on
week-ends or evenings. She then said that for those reasons the
Corporation decided to hire a nanny.
[11] Slawinsky also said that the nannies provided care for
her child, that being their first priority. She said they did
some housekeeping work, if time allowed, but it was neither
expected nor required. She said that there was no meal
preparation for her or anyone else in the household except the
child. She stated that they did no errands or shopping or
anything of that nature and that, in fact, one of the nannies had
no driver's license or vehicle. She stated further that nanny
services were not available to other employees of the
Corporation.
ANALYSIS AND CONCLUSION:
[12] The celebrated case of Symes v. Her Majesty the
Queen, 94 DTC 6001 is the leading authority respecting
deductibility of child care expenses by the individual who
paid them. That case involved a woman lawyer who sought
deductibility of the full cost of employing a nanny to care for
her pre-school children to enable her to engage in the practice
of law. She, herself, was practising law and was not the employee
of a corporation providing legal services. The Supreme Court of
Canada determined that her deduction would be limited to the
amounts authorized by section 63 of the Act. At page 6020
Iacobucci, J. said:
... a straightforward approach to statutory interpretation has
led me to conclude that the Income Tax Act intends to
address child care expenses, and does so in fact, entirely within
s. 63. It is not necessary for me to decide whether, in the
absence of s. 63, ss. 9, 18(1)(a) and 18(1)(h) are capable of
comprehending a business expense deduction for child care. Given
s. 63, however, it is clear that child care cannot be considered
deductible under principles of income tax law applicable to
business deductions.
That section provides a measure of tax relief to a taxpayer
who, in order to pursue a gainful occupation away from home or to
receive education, must pay someone to look after children while
he or she is at work or at school.
[13] Respondent's counsel referred at length to the
extensive analysis by Iacobucci, J. in Symes. His comments
were made in the factual context that existed in Symes,
namely that Symes personally paid child care expenses to
enable herself to be free to practice law. That is not the
situation in this case. The corporation is a separate entity and
it made a decision to pay the nanny expenses. The fact that it is
not at arm's length with Slawinsky cannot blur the issue of
deductibility. Non arm's-length relationships are
substantially, for tax purposes, tied to valuation
considerants.
[14] Section 63 has no application to the Corporation since it
clearly refers only to the deduction of childcare expenses paid
by the taxpayer for the care of a child of that taxpayer. As the
learned Justice said in Symes, at page 6014:
The analytical trail leads back to its course, and I simply
ask the following: did the Appellant incur child care expenses
for the purpose of gaining or producing income from a
business?
[15] Accordingly, the first question to be determined is
whether such expenses are deductible by the Corporation by virtue
of the provisions of section 9 and section 18(1)(a) of the
Act. The Corporation is a separate legal entity from
Slawinsky and is not to be confused with her or amalgamated with
her in the analysis of the issues.
[16] Section 9 of the Act includes in income
"profit" from a business.
[17] In determining profit, paragraph 18(1)(a) is a
general prohibition respecting deductions. It prohibits the
deduction of any outlay or expense that is not made or incurred
for the purpose of gaining income from business or property. In
Royal Trust Company v. M.N.R., 1957 C.T.C. 32 at 44 the
President of the Exchequer Court said:
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.
[18] The Supreme Court of Canada considered paragraph
18(1)(a) in B.C. Electric Co. Ltd. v. M.N.R.,
[1958] C.T.C. 21 (S.C.C.). The Court observed, at page 31, that
virtually all expenditures of a business enterprise are made for
the purpose of earning income. They might, however, be prohibited
from being deducted by some other section of the Act.
Since the main purpose of every business undertaking is
presumably to make a profit, any expenditure made "for the
purpose of gaining or producing income" comes within the
terms of [paragraph 18(1)(a)] whether it be classified as an
income expense or as a capital outlay.
Once it is determined that a particular expenditure is one
made for the purpose of gaining or producing income, in order to
compute the income tax liability it must next be determined
whether such disbursement is an income expense or a capital
outlay.
[19] This is clearly not a capital expenditure, no asset or
advantage for the enduring benefit of a trade having come into
existence.[3]
[20] Respondent's counsel referred to the learned
Justice's statement in Symes that it may be relevant
in a particular case to consider whether a deduction is
ordinarily allowed as a business expense by accountants. He said,
in this regard:
Similarly, it may be relevant to consider whether the expense
is one normally incurred by others involved in the taxpayer's
business. If it is, there may be an increased likelihood that the
expense is a business expense.
[21] Since this is the first case with this fact situation to
be taken before a Canadian Court, and since no accounting
evidence was adduced with respect to whether such expenses are
"normally incurred by others involved in the taxpayer's
business", the learned Justice's comments are not of
assistance to the Respondent's case.
[22] I accept Slawinsky's evidence that she provided legal
services to the Corporation at regular and fairly irregular hours
and intervals. The Corporation had no source of revenue other
than from her services.
[23] However, an employee's remuneration is normally
determined without regard to that employee's costs incurred
to be presentable. The cost of care of an employee's
children, as are other expenses associated with preparing an
employed person to present himself or herself at work, is
essentially personal in nature. Iacobucci, J. discusses this
question in some detail in Symes. At page 6010 he refers
to Bowers v. Harding (1991) 3 Tax Cas. 22 (Q.B.) in which
engaging a household servant "to enable his wife to have
time to perform her duties as a schoolmistress" was
tantamount to other obviously personal expenditures, the cost of
that servant being disallowed as a deduction. Although the
Iacobucci, J. said that he did not feel that he must
"slavishly follow those cases which have characterized child
care expenses as personal in nature", he does not reject
that basic proposition. He also, at page 6011, referred to B.J.
Arnold's treatise, The Deduction for Child Care Expenses
in the United States and Canada: A Comparative Analysis
(1973) in which the author said:
The test established by the case for distinguishing between
personal and living expense involved a determination of the
origin of the expense. If the expenses arose out of personal
circumstances rather than business circumstances the expense was
a non-deductible personal expense.
Although Iacobucci, J. states that such conclusion is subject
to attack he does not reject that premise.
[24] It can be argued that the Corporation incurred the nanny
expenses solely for the purpose of gaining or producing income.
However, as stated above, Slawinsky had to be able to present
herself to the employer to perform her employee services. Such
presentation includes expenditures for numerous items and
services that are personal in nature. One of these is child
care.
[25] Accordingly, I conclude that the nanny expenses, per se,
were not amounts paid by the Corporation for the purpose of
gaining or producing income. However, because I conclude that
they are included in Slawinsky's income under paragraph
6(1)(a) of the Act as
... benefits ... received or enjoyed by the taxpayer ... in
respect of, in the course of, or by virtue of an office or
employment ...
they may be deducted by the Corporation. The result is the
same as though those sums were paid by the Corporation to
Slawinsky with her paying equal amounts to the nannies. In
essence, the Corporation made payments on her behalf, the value
of the benefit to Slawinsky being equal to the amounts paid by
the Corporation.
[26] Slawinsky's appeals for the 1994 and 1995 taxation
years, but for the allowance of the amounts of $5,000 in each
such year under section 63 of the Act, will be dismissed
without costs.
[27] The Corporation's appeals will be allowed with
costs.
Signed at Ottawa, Canada this 20th day of December,
1999.
"R.D. Bell"
J.T.C.C.
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