14 January 2005 External T.I. 2004-0103591E5 - Child Care Expenses

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.

Principal Issues:

1) Whether the payment by an employer to a child care provider of a portion of the cost of the care of a child of an employee results in a taxable benefit to the employee.

2) Whether the employer can deduct the payment to the child care provider as a business expense.

Position:

1) The payment by the employer directly to the child care provider for a portion of the cost of the care of a child of an employee will result in a taxable benefit to the employee.

2) Question of fact, generally the cost of employee benefits is deductible to the employer.

Reasons:

1) Employer does not provide in-house childcare services. The payment is to a third party. Paragraph 6(1)(a) of the Act includes in income the value of other benefits of any kind whatever.

2) Paragraph 18(1)(a) of the Act requires that an outlay or expense be incurred for the purpose of gaining or producing income in order to be deductible. The Supreme Court of Canada determined in the case of Canderel Ltd. v The Queen that a taxpayer must ascertain whether the deduction of an expense is consistent with the ordinary principles of accepted business practices. Employee benefits are generally considered deductible.

2004-010359
XXXXXXXXXX Luisa A. Majerus, CA
(613) 957-2138
January 14, 2005

Dear XXXXXXXXXX:

Re: Child Care Expenses

This is in reply to your letter of November 10, 2004, requesting whether or not employer subsidized childcare expenses of an employee results in a taxable benefit. Furthermore, you have inquired whether or not these payments will be deductible by the employer in calculating business income.

Specifically, you have indicated that an employee currently pays a provincially regulated childcare provider a monthly amount of $500 for the care of a child. The employer pays an amount of subsidy of $200 per month, in respect of this child, directly to the childcare provider.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.

Paragraph 6(1)(a) of the Income Tax Act (the "Act") includes in an employee's income the value of any benefit received or enjoyed by the employee in respect of his or her employment. It is our view that where a personal expense is paid directly by an employer, the employee will normally be considered to have received a taxable employment benefit. Accordingly, it is our view that in the situation outlined above, the amounts paid by the employer directly to the provincially regulated childcare provider will result in a taxable benefit to the employee.

Paragraph 18(1)(a) of the Act provides that in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. It is our view that the cost of employee benefits incurred by an employer is generally deductible.

We trust this information is helpful.

Yours truly,

John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch