15 January 1992 Income Tax Severed Letter 249

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.

Subject: IN-HOUSE CARE EXPENSES Section(2): 63, 118.2, 118.3]

NOTES FOR A PRESENTATION GIVEN BY
PAUL FUOCO TO

• CANADIAN COALITION FOR IN-HOME CHILD AND DOMESTIC CARE ANNUAL MEETING WEDNESDAY, JANUARY 15, 1992

44 CHARLES STREET WEST
TORONTO, ONTARIO

In-House Care Expenses

Thank you for the invitation to speak to you today on how the present income tax legislation affects employers of in-house help for the care of children, the elderly and the handicapped.

The primary consideration from an income tax perspective is whether the costs for such in-house care are deductible from income. In order to be so deductible, such expenses must either be specifically permitted as an expense incurred to earn employment income, or have been incurred for the purpose of gaining or producing income from a business pursuant to paragraph 18(1)(a) of the Income Tax Act and must not be considered personal or living expenses.

In general terms, the courts have held that a taxpayer is carrying on a business when there is a reasonable expectation of profit from that business. Expenses are deductible in computing the income from that business only when they are directly incurred to earn the business income.

Personal or living expenses include items such as housing, clothing, food, medical bills, etc. If a particular expense is not deductible as an employment or business expense, the Income Tax Act would require a specific provision to permit a deduction for it. Such is the case with items such as contributions to an RRSP and moving expenses as well as child care expenses within certain limitations. Although these are personal or living expenses, the Income Tax Act has specific provisions to allow for their deduction. Since in-house costs for the care of children, the elderly, and the handicapped are not specifically mentioned as a deduction in earning employment income, nor are they directly incurred to earn business income and there is no specific provision in the Act (other than that previously mentioned with respect to child care expenses) which permits a direct deduction from income for these costs, such personal or living expenses cannot be deducted for income tax purposes.

In relation to these comments, a recent decision rendered by the Federal Court of Appeal in the Elizabeth Symes case [[1991] 2 C.T.C. 1] (91 DTC 5397) is relevant. This case concerned whether a salary paid to a nanny was a deductible business expense by a self-employed lawyer. The conclusion of the court was that these expenses, other than the amount permitted by section 83 of the Act, were not deductible in computing business income.

One basis for suggesting that the nanny's salary was a deductible business expense was that when women moved into the labour market during the 1970s, this altered the scenario in which business was carried out. Women who have young children bear the main part of the burden in caring for them and if they want to work, they must use child care services. Accordingly, it was argued that such expenses should be deductible in computing business income.

However, the court held that as a consequence of the specific child care expense provisions in section 63 of the Act, the nanny's salary could not be deducted as a business expense.

A second issue in this case related to whether the taxpayer's equality rights as a parent and as a woman were violated in contravention to subsection 15(1) of the Charter of Rights. On this issue, the Court did not see how the child care expense provisions of the Income Tax Act could directly or indirectly infringe the right of women to equality. The Court was also of the view that Parliament adopted the child care expense provisions in the enlightened exercise of its discretion and that it is not the function of the Court to substitute its choice for the one made by Parliament. However, this case might be heard by The Supreme Court of Canada as the taxpayer has sought leave to appeal the decision by the Federal Court of Appeal.

Since the in-house costs are not deductible as a business expense, reference must be made to specific provisions of the Income Tax Act which provide relief for in-house care of children, the elderly, and the handicapped.

Child Care Expenses

As I am sure you are all aware, section 63 of the Income Tax Act provides tax relief for child care expenses when they allow an individual and another supporting individual if there is one, of an eligible child to

• • earn employment income - earn income from self-employment - take an occupational training course for which the individual or another supporting person received a training allowance under the National Training Act; or - carry on research, or similar work, for which the individual or the other supporting person received a grant.

Full details of this deduction in computing income are available in the Department's annual guide on the subject.

Employed or Self-employed?

While I don't think it is necessary for me to go through the detailed rules on the deductibility of child care expenses, I have a related point that I would like to mention.

This concerns the determination as to whether the person providing the child care services is an employee or is self-employed. This is important for two main reasons:

• 1. The expenses incurred in providing the child care can only be deducted by the service provider if that person is self-employed.
• 2. Where the service provider is not self-employed but rather an employer-employee relationship is involved, income tax, Canada (or Quebec) pension plan contributions, and unemployment insurance premiums must be withheld and remitted to the Receiver General.

The amount of control that the contracting parent has over the service provider's work is the primary factor in determining whether that person is an employee or self-employed. This is usually made clear with the contracting parent when the two parties decide how the day-care services are to be performed.

Generally, an employer-employee relationship will be considered to exist where:

• • the service provider works at the parent's home and the parent specifies the work to be done,; - the parent has set out definite working hours and supervises how the work is to be carried out - the parent pays the commuting costs the service provider incurs in the course of providing the services; and - the service provider must devote all of her/his time to the parent's children.

Generally, a service provider will be considered to be self-employed if the service provider controls:

• • the number of hours worked; - the premises and materials used; - the way in which the day-care duties are carried out.

However, in any particular case, there may be other factors that need to be considered in determining the status of the person providing child care expenses. If, in a particular situation you are unsure how the relationship will be regarded by the Department, you can request (in writing) a determination through the Source Deductions Section of your local district taxation office. Please ensure that all the facts and relevant documentation accompany your request.

The Elderly and the Handicapped

Tax relief is available under the Income Tax Act with respect to costs incurred in employing attendants for the elderly and handicapped in the form of tax credits for qualifying medical expenses. Again, I don't see the need to explore these rules in detail as I am sure you are all aware of their existence,; however, the question as to the status of the relationship between the recipient of the services and the service provider must be settled.

As a final comment, I would just mention that, in connection with a number of expenses described above, payments may be made to an agency for supplying an attendant while in other cases the attendant may be hired directly as an employee. With respect to these two types of situations, the manner in which care services are obtained has no effect on the tax treatment of payments that are made. However, as I mentioned earlier, when an attendant has been hired as an employee, income tax, Canada (or Quebec) Pension Plan, and unemployment insurance must be withheld from amounts paid to the employee.

APPENDIX “A”

Child Care Expenses

Section 63 of the Income Tax Act provides tax relief for child care expenses when they allow an individual and another supporting individual if there is one, of an eligible child to

• • earn employment income - earn income from self-employment - take an occupational training course for which the individual or another supporting person received a training allowance under the National Training Act; or - carry on research, or similar work, for which or another supporting person received a grant.

Child care expenses can generally be described as amounts an individual pays to someone for looking after his/her children.

This includes amounts paid to

• • friends, neighbours, or other persons; - relatives 18 years of age or older - nursery schools - day-care centres - educational institutions for child care services - day camps or day sports schools your child attends boarding schools or sports schools where lodging is involved.

Payments made to someone who takes care of a child at lunchtime, or before and after school may also be claimed. However, child care expenses do not include amounts paid for medical or hospital care or for clothing, transportation, or education costs.

For Child care expenses to be deductible, the individual must be a supporting person and the child must be an eligible child.

Who is an eligible child?

For child care expenses, an eligible child can be

• • the individual's child - the child of the individual's spouse, or - a child for whom you have claimed a personal tax credit

provided that in all of these instances, the child was, at any time during 1991, under 14 years of age or over 14 but was dependent on the individual or the individual's spouse and was mentally or physically infirm.

Who is a supporting person?

A supporting person of an eligible child includes:

• • the child's parent - an individual's spouse, or - any other person claiming a personal amount for the eligible child,

if the parent, spouse, or other person claiming the personal amount, lived with the individual at any time in 1991, and at any time within the first 80 days of 1992.

For the purposes of my comments, an individual who has an eligible child is considered to be a supporting person.

Certain payments cannot be deducted by an individual if

• • another person has deducted the expenses, or - you or another supporting person received, or are entitled to receive a reimbursement of the expenses or other form of assistance not included in income.

In addition, an individual cannot deduct child care payments made to:

• • the father, mother, or supporting person of the eligible child - a person for whom the individual, or another supporting person a personal tax credit, or - a person who is under 18 years of age and related to you or your spouse

An individual can deduct child care expenses paid for an eligible child living with the individual if there is no other supporting person. When there is another supporting person, generally, whoever has the lower net income before deducting certain amounts can deduct child care expenses. However, if the individual and the other supporting person have equal net incomes, they have to decide which one will claim the child care expenses since they cannot be split. Otherwise, neither of them will be permitted to claim the expenses.

How much can an individual or other supporting person deduct?

The least of the following three amounts can be deducted:.

• • the amount the individual and the other supporting person actually paid for child care services; - 2/3 of the earned income as defined of the person claiming the child care expenses; or - $4,000 x each eligible child who - was 6 years of age or under on December 31, 1991;

or

• • has a severe and prolonged mental or physical impairment, and for whom the individual or another supporting person has submitted Form T2201, Disability Credit Certificate plus
• $2,000 x each eligible child who was 7 to 14 years of age on December 31, 1991 or 14 or over and was dependent on you or your spouse and who has a mental or physical infirmity other than one that is a severe and prolonged impairment as previously described.

However, when payments are made to a boarding school, an overnight sports school, or an overnight camp for child care, there are limits to the amount that qualify as child care expenses. Depending on the circumstances, the most that the individual or the supporting can claim is $120 per week or $60 per seek depending on the circumstances of the eligible child.

As I previously mentioned, the supporting person with the lower net income usually deducts child care expenses. However, there are times when the supporting person with the higher net income is allowed to deduct these expenses.

Examples of this type of circumstance occur while the supporting person with the lower net income

• • attended a designated educational institution full time, or - was confined, for at least two weeks of the year, to a bed, wheelchair, or as a patient in a hospital, asylum, or other similar institution, because of a mental or physical infirmity, and was incapable of caring for children.

In the latter situation, a statement from the attending physician needs to be attached which indicates the nature and duration of the infirmity.

The supporting person with the higher income is also limited to the amounts of $120 or $80 per week depending on the circumstances of the eligible child. As well, the supporting person with the lower net income has to take that deduction into account in calculating his/her allowable child care expense claim.

When a person claims child care expenses, Form T778, calculation of Child Care Expenses Deduction for 1991, must be filled in and attached to the tax return.

While it is not necessary to send in receipts for child care expenses with a return, the person has to be able to provide them for examination if requested by this Department.

APPENDIX “B”

The Elderly and the Handicapped

Most of the provisions that I am going to talk about provide relief in the form of tax credits that are applied against an individual's income tax liability.

The first is the Disability Tax Credit

An individual may be able to claim the disability tax credit if:

• • the individual had a severe mental or physical impairment in 1991, the effects of which caused him/her to markedly restricted all or almost all of the time the individual's basic activities of daily living; and - the impairment has lasted or is expected to last for a continuous period of at least 12 months.

The amount of this credit is $700

To determine whether an individual may be able to claim this credit, the individual can refer to the following questions:.

• Is the individual legally blind? Is the individual unable to feed and dress himself or herself, eliminate, walk, speak, hear, or perceive, think and remember?

If the answer is yes to any of the questions, the individual may be markedly restricted in his/her activities of daily living. The individual may also be markedly restricted if it takes him/her an extremely long time to perform these activities.

To qualify for the disability amount, the individual has to be markedly restricted all or almost all of the time. If the individual is markedly restricted occasionally or part of the time, he/she is not entitled to this tax credit.

It should also be noted that if the individual or any other person claims medical expenses for a full-time attendant, or for care in a nursing home because of the individual's physical impairment, the individual cannot claim the disability tax credit. The expenses or the disability tax credit can be claimed, whichever is more favourable, but not both.

Who can claim the disability tax credit?

An individual can claim the disability credit or the individual can transfer to his/her spouse or other supporting individual the part of the credit that the individual does not need to reduce tax payable to zero. Under certain circumstances, the individual may be able to claim the unused portion of his/her spouse's or other dependant's credit.

To claim the disability tax credit, Form T2201 must be used.

Medical Expenses (set out for Paul's info but not part of speech)

The second type of item involves a tax credit claim in respect of medical expenses. Before referring to certain types of medical expenses, I am making comments on medical expenses in general.

An individual can claim medical expenses if:

• • they were paid for the individual, his/her spouse or the dependants the individual is entitled to claim on his/her return. - they were paid in any 12-month period ending in 1991 and were not claimed in 1990; and - the individual's total expenses are more than $1570 or 3% of your net income, whichever is less.

A further point is that an individual cannot claim medical expenses for which a reimbursement has been received.

The following is a summary of some examples of medical expenses that could relate to the elderly and the handicapped:

• • expenses for modifying an individual's home to allow the individual to be mobile and functional if the individual is confined to a wheel chair for a long-time or lacks normal physical development - expenses for modifying an individual's home to allow the individual to be mobile and functional if the individual has a severe and prolonged mobility impairment. (In both of the above cases, Form T2201 is required) Other expenses - payments and expenses for an animal trained to help a person with a severe and prolonged impairment which markedly restricts the use of the arms or legs. - expenses incurred in the care, or the care and training, of an individual at a school, institution or other place when that individual has been certified by an appropriately qualified person.

In addition, an individual may be able to claim a credit for amounts paid for a full-time attendant or for full-time care in a nursing home. A doctor has to sign a letter or a valid Form T2201 to the effect that the person receiving care had a severe mental or physical impairment in 1991.

However, an individual may not claim a credit for expenses paid for a full-time attendant or care in a nursing home if anyone claims a disability credit for the disabled person. An individual may claim the more favourable amount but not both.

It is also now possible to claim a credit for amounts paid for a part-time attendant. However, if an individual makes a claim for attendant care expenses discussed below, the individual cannot claim a credit for the amount paid for a part-time attendant for the same person. Amounts paid for a part-time attendant for which a credit can be claimed cannot be more than $5000 or $10,000 in the year of death.

The last type of item involves a deduction, as opposed to a tax credit, for attendant care expenses.

An individual can claim up to a maximum of $5,000 paid for attendant care if all of the following conditions are met:

• • the individual is entitled to claim the “disability tax credit” - The expenses were paid for care in Canada that enabled the individual to earn income from employment or self-employment, take an occupational training course for the individual a training allowance under the National Training Act, or carry on research or similar work for which the individual received a research grant. - The expenses were not claimed as medical expenses for 1991 or any other year, and - the expenses were paid to a person 18 years or older who is not the individual's spouse.

To calculate the amount an individual can claim, Form T929, Attendant Care Expenses, should be completed and attached to the individual's income tax return.