15 May 1986 Income Tax Severed Letter 5-0458 - [*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.

XXXX

N.R. Mitchell (613) 993-7295

MAY 15 1986

Dear Sirs:

Re: Child Care Expenses

This is in reply to your letter of January 24, 1986, concerning the deductibility of child care expenses in two hypothetical fact situations.

You have first asked us to compare the situation of Mr. and Mrs. A., who have two children, with that of Mr. and Mrs. B, who have one child. Both parents in each of these families work full-time and both families employ a live-in nanny to care for their children. The nannies are paid the same government-set minimum wage of $827 per month or $9,924 per year.

Because section 63 of the Income Tax Act (the "Act") relates the deduction available for child care expenses to the number of children of the taxpayer in respect of whom eligible child care expenses were incurred, a deduction of up to $4,000 could be available to the A's while the B's would be limited to a deduction of $2,000.

As you see it, since both families incur the same out-of-pocket expense, and given that via section 63 of the Act, family B is entitled to a lesser deduction than family A, a prima facie case of discrimination exists. You refer to subsection 15(1) of the Canadian Charter of Rights and Freedoms which provides that every individual is entitled to "equal benefit of the law without discrimination". It is your submission that a strong legal argument can be made that families A and B are entitled to deduct their child care expenses up to the $8,000 ceiling set out in paragraph 63(l)(e) of the Act without consideration of the number of children that each has.

We cannot agree with your proposed interpretation of section 63 of the Act. In administering the provisions of the Act concerning the deductibility of child care expenses, this Department would be obliged to observe the limitation set out in subparagraph 63(1)(e)(ii) of the Act based on the number of children of the taxpayer. The Department must apply the provisions of the Act as legislated by Parliament and as interpreted by the Courts. We would also advise you that the responsibility for initiating any amendments to the Income Tax Act lies with the Department of Finance.

The second question you have asked arises from the following hypothetical situation. Mr. and Mrs. A both work and have one child and a live-in nanny. Mrs. A earns less than Mr. A and she earns her income from a business. As you see it, since in order to be able to work it is necessary for Mrs. A to have a live-in nanny, the amounts paid for the services of the nanny should be fully deductible (presumably under paragraph 18(1)(a) of the Act) in computing Mrs. A's income from business, on the basis that these amounts were laid out for the purpose of gaining or producing income from the business.

It is our position that the expenses in question are not deductible other than pursuant to, and within the limitations set by, section 63 of the Act. Child care expenses and payments to or on behalf of domestic servants, such as nannies, are in the nature of "personal or living expenses" and are not deductible in computing the income of a taxpayer from a business by reason of the specific exclusion set out in paragraph 18(1)(h) of the Act. In our view, the case of Olympia Floor & Wall Tile (Quebec) Ltd. v. M.N.R. 70 DTC 6085 is not applicable to the issue at hand.

We hope that this letter will be of some assistance to you.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch