14 June 2010 External T.I. 2010-0365202E5 - Child care expense - holding a place

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: Are day care expenses paid to hold a child's position during a parent's temporary leave of absence deductible as a child care expense?

Position: An individual would generally be allowed a child care expense deduction if there is a sufficient nexus between the making of the payment and the eventual resumption of activity carried on before the leave of absence. In the case of employment, the taxpayer would have to remain employed during the period of absence and eventually return to work with the same employer.

Reasons: The purpose test in section 63 of the ITA would not require that the child care expense be incurred at the same time as the resumption of the activity carried on before the leave of absence.

XXXXXXXXXX
									2010-036520
      								P. Waugh
June 14, 2010

Dear XXXXXXXXXX :

Re: Child Care Expense Deduction

I am writing in response to your email of April 27, 2010 concerning the deductibility of child care expenses under subsection 63(1) of the Income Tax Act (the "Act") where payments have been made to hold a day care position during a parental leave of absence from employment.

In the situation you described, your husband took a leave of absence from his job to enjoy three months of parental leave with your children aged XXXXXXXXXX years, XXXXXXXXXX years, and XXXXXXXXXX months. Your husband remained employed during the leave of absence and returned to his job with the same employer after the parental leave ended. Since your daycare has a waitlist of two years, you were required to continue day care payments for your two oldest children during the parental leave to maintain their positions in the daycare until the parental leave ended.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Section 63 of the Act provides a deduction for amounts paid for child care expenses incurred in respect of an "eligible child" of the taxpayer. To qualify, the child care expenses must be incurred in order to enable the taxpayer, or a "supporting person" of the child, to perform duties of an office or employment, to carry on business or, in certain instances, to carry on research, or attend a designated educational institution or a secondary school. There are a number of other requirements that have to be met in order for a taxpayer to be entitled to deduct child care expenses. For more information on the rules for child care expenses, including the limits on the amount of the deduction, please refer to Interpretation Bulletin IT-495R3, Child Care Expenses, and Form T778, Child Care Expenses Deduction.

Assuming all other conditions to qualify as a child care expense are met, with respect to child care payments being made during a taxpayer's temporary leave of absence from employment, it is our view that fees paid to maintain a place in a day nursery or to ensure babysitting services would qualify as a child care expense where the taxpayer remained employed during the temporary leave of absence and the payments were made with the eventual aim of enabling the taxpayer to return to work with the same employer.

Depending on the facts of each case, similar payments as described above made during a temporary leave of absence from carrying on a business or research, or from attendance at a designated educational institution or a secondary school, may also qualify as a child care expense. There would have to be a sufficient nexus between the making of the payment to hold the place and the eventual resumption of activity carried on before the leave of absence.

We trust these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch