2 April 2001 External T.I. 2001-0068935 - SURROGOCY ARRANGEMENTS

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: Tax treatment of payments received under a "gestational surrogacy contract" for services rendered by a "surrogate mother" and treatment of related expenses.

Position: Payments under a commercial arrangement would be taxable as business income and expenses incurred to earn the income would generally be deductible, provided the taxpayer has a reasonable expectation of profit and subject to other limitations provided in the Act.

Reasons: The payments are in consideration for services rendered according to our understanding of the contractual relationship between the "Intended Parents" (the payors) and the "Gestational Carrier" (the beneficiary).

		April 2, 2001

Mr. Fred Barrett	HEADQUARTERS
St. John's TSO	Patrick Massicotte
	Client Services	(613)  957-9232

2001-006893

Payments for Surrogate Parenting

This is in reply to your round trip memo of January 30, 2001, regarding the application of the provisions of the Income Tax Act ("Act") to a hypothetical situation involving payments received by a taxpayer in consideration for services rendered under a surrogacy arrangement. Our comments are based on the sample surrogacy contract you have provided with your request.

Our Comments

Our research indicates that commercial surrogacy arrangements are legally prohibited in Canada. An Interim Moratorium on Reproductive and Genetic Technologies was issued by Health Canada in July 1995 prohibiting such practices and an Advisory Committee was created in January 1996 to monitor its compliance, pending legislation. Surrogacy arrangements are perceived by Health Canada as turning children and reproduction in general into commodities, violating principles of non-commercialization of reproduction and respect for human dignity. It is expected that new legislation will prohibit inter alia payments to or offers to pay a woman to carry a child for the purposes of surrendering it to another person.

The sample surrogacy contract provided to us seems to be from a source in the United States of America, where there appears to be no national legislation or regulatory regime for such arrangements. Payments to a Gestational Carrier in Canada may therefore differ from such sample arrangement, and income tax consequences may accordingly vary.

In the event arrangements such as the sample surrogacy contract provided are nonetheless entered into in Canada, it has been established that "income" is subject to taxation although it may be from illegal activities (see M.N.R. v. Eldridge, 64 DTC 5338. (Exch. Ct.); Espie Printing Co. v. M.N.R., 60 DTC 1087 (Exch. Ct.)). Whether or not an amount (including the value of any non-cash consideration or benefit) received by a taxpayer is to be included in that taxpayer's income will depend upon whether the amount represents income from a source to the taxpayer.

As indicated in paragraph 1 of interpretation bulletin IT-334R2, Miscellaneous Receipts, section 3 of the Act brings into income, for tax purposes, a taxpayer's income from all sources and the taxable portion of capital gains net of allowable losses. Unless specifically exempted by a provision of the Act, a taxpayer will usually be taxable in full on all non-capital receipts from a source, including amounts received which can be characterized as income from a business (which could include an amount received in respect of an isolated transaction), property, office or employment.

The case generally referred to in discussing the concept of "source of income" is Moldowan v. The Queen, 77 DTC 5213 (SCC). In that case, Dickson J. stated as follows:

"...it is now accepted that in order to have a source of income the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business".

Therefore, it is generally our view that where an activity does not generate a profit and offers no expectation of profit (net income), there is no "source of income". Accordingly, in such situations, there is generally no gross income to include in computing income (sections 3 and 4 of the Act) and no deduction for expenses is allowed. Whether a taxpayer has a reasonable expectation of profit resulting from an activity or undertaking is an objective determination to be made from all of the facts of the situation (see Moldowan above, at p.5215).

It is a general principle that when a person habitually does a thing that is capable of producing a profit or income, then he/she is engaged in a trade or business notwithstanding that these activities may be quite separate and apart from his/her ordinary occupation, unless it constitutes an office or employment.

The term "business" is defined in subsection 248(1) of the Act to include inter alia a profession, a calling, a trade, manufacture or undertaking of any kind whatever and, except for certain provisions, an adventure or concern in the nature of trade. A business generally involves the sale of goods or services. It has been defined as an undertaking "which occupies time and attention and labor for the purpose of profit" (see The Rideau Club v. The Corporation of the City of Ottawa, (1907), 15 O.L.R. 118, 122; Smith v. Anderson, (1880), 15 Ch. D. 247, 258; re Pszon (1946) 2 DLR 507 at 511).

It is our view that entering into a contract under which services are to be rendered in consideration for compensation or remuneration, otherwise than by virtue of an office or employment, is prima facie evidence of an undertaking of a business nature. Receipts from such arrangements would therefore generally be income from a source that is a business, subject to section 3 of the Act, provided there is a reasonable expectation of profit.

In the case submitted, our understanding of the relationship between the "Intended Parents" and the "Gestational Carrier", according to the provisions of the sample surrogacy contract provided, is that the payments are received by a Gestational Carrier in consideration for services rendered or to be rendered to Intended Parents, and should therefore constitute a source of income for the purposes of the Act, provided there is a reasonable expectation of profit from such activity.

The following provisions of the sample surrogacy contract clearly reflect each parties' intentions:

"8. The Gestational Carrier further agrees that...she is entering into this Agreement with the intention of providing a service to the Genetic Father and Genetic Mother...;

(...)
12. The Gestational Carrier ... agrees to assume all risks, including risk of death that are incident to conception, pregnancy, and childbirth, including ...;
(...)

35. In recognition of the Intended Parents appreciation toward the Gestational Carrier ... as a result of her participation in this Agreement ... the Intended Parents hereby agree to provide the Gestational Carrier with the following amounts..."

A schedule of payments is provided in paragraph 35 of the sample contract (although the amount of the payments is not disclosed), to which the Gestational Carrier becomes entitled as the services are rendered (in addition to the reimbursement of a number of expenses). The scheduled payments are directly related to the services rendered and are required only as a result of such services. In our view, this constitutes remuneration for services rendered, even though they may be labeled otherwise (e.g. reimbursement of living expenses, compensation for loss of service, etc.).

We realise it could also be argued that the amounts made available under such an arrangement are on account of the Intended Parents' debt of gratitude toward the Gestational Carrier for the possibility of giving birth to their genetic child. However, it is our view that the primary purpose of amounts paid or made available under a commercial surrogacy arrangement is to remunerate the Gestational Carrier for her services, as these are made available in recognition of specific services to be rendered and not only to compensate her for incremental costs.

Receipts such as gifts and windfalls generally fall outside the scope of the source doctrine, as mentioned in paragraphs 3 and 4 of IT-334R2, Miscellaneous Receipts.

In the case submitted, however, the payments cannot be said to be gifts, that is, voluntary transfers of real or personal property without consideration, since they are required under the surrogacy contract. In addition, these amounts must be funded appropriately in an escrow account upon execution of the contract and are therefore not voluntary payments. Moreover, the payments are not "without consideration" as the Intended Parents do receive valuable services in exchange, without which no payments would be made. In fact, in the event the services are not rendered, or not rendered as agreed upon, no payments are required to be made and those already made must be returned (see paragraph 44 of the sample contract).

In the case of Mills v. MNR, 78 DTC 1851 (TRB), it was held that amounts received by a taxpayer, after having rendered specific services, were income even though the payments were made on a voluntary basis, as donations or gifts, as an expression of gratitude, and no fees were charged by the taxpayer.

It also cannot be said in the situation submitted that the payments meet any of the factors identified in the case of The Queen v. Cranswick, 82 DTC 6073 (FCA), allowing them to be considered a non taxable receipt (i.e. a windfall), since:

(a) the taxpayer has an enforceable claim to the payments pursuant to the terms of a surrogacy contract,

(b) the taxpayer makes numerous efforts to receive the payments, i.e. submits herself to several restrictions and labours for a considerable period of time, assumes important risks, etc;

(c) the taxpayer seeks after and solicits the payments by entering into a surrogacy contractual relationship with the Intended Parents;

(d) the taxpayer has a clear and specific expectation to receive the payments under the surrogacy contract provisions;

(e) the taxpayer has reason to expect the payments will recur as long as she is involved in such arrangements;

(f) the payments are from a customary source of income for taxpayers involved in such arrangements;

(g) the payments are in consideration for or in recognition of services provided or to be provided by the taxpayer, and are therefore earned by the taxpayer.

Considering all of the above comments, it is our view that in a case such as the sample surrogacy contract you provided us, all the payments made thereunder would generally constitute income for the recipient that would be from a source that is a business, provided there is a reasonable expectation of profit. The payments result from services rendered in the context of an undertaking of a business nature. Such a project occupies the time, attention and labor of the Gestational Carrier.

As for the expenses the Gestational Carrier may incur in such situations, no deduction may be allowed unless the activity constitutes a source of income and involves a reasonable expectation of profit so that the receipts would be subject to taxation under section 3 of the Act. Where the activity constitutes a business, expenses incurred for the purpose of gaining or producing such income, provided there is a reasonable expectation of profit, would be deductible pursuant to subsection 9(1) of the Act, subject to restrictions provided in the Act, such as those in paragraph 18(1)(b) concerning capital outlays, 18(1)(h) concerning personal and living expenses, etc.

In regards to personal expenses, Iacobucci, J. observed in the case of Symes v. Canada,

94 DTC 6001 (SCC), at p. 6015:

"If a need exists even in the absence of business activity, and irrespective of whether the need was or might have been satisfied by an expenditure to a third party or by the opportunity cost of personal labour, then an expense to meet the need would traditionally be viewed as a personal expense. Expenses which can be identified in this way are expenses which are incurred by a taxpayer in order to relieve the taxpayer from personal duties and to make the taxpayer available to the business. Traditionally, expenses that simply make the taxpayer available to the business are not considered business expenses since the taxpayer is expected to be available to the business as a quid pro quo for business income received."

We trust that these comments will be of assistance to you.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898.

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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