Tremblay T.C.J.:
1 This appeal was heard at Montréal, Quebec under the informal procedure on June 25, 1996.
1. Point at issue
2 According to the Notice of Appeal and the Reply to the Notice of Appeal, the issue is whether in computing his income for 1994 the appellant was entitled to claim child care expenses amounting to $4,592.
3 The Minister disallowed the deduction, on the ground that child care expenses can only be deducted from earned income within the meaning of s. 63(3)(b) of the Income Tax Act (the “Act”). The Minister contended that the appellant had no earned income in 1994.
4 The appellant argued that the amounts received as unemployment insurance training benefits and child care allowances should be regarded as earned income.
2. Burden of proof
5 2.01 The appellant has the burden of showing that the respondent's reassessment is incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195 (S.C.C.).
6 2.02 In the instant case the facts assumed by the respondent are set out in subparagraphs (a) to (d) of paragraph 6 of the Reply to the Notice of Appeal. They read as follows:
[TRANSLATION]
- 6. In issuing the notice of ratification of October 19, 1995, in respect of the notice of assessment of May 15, 1995, for the 1994 taxation year, the Minister of National Revenue (the “Minister”) took into account inter alia the following facts:
b. during the year at issue the appellant allegedly paid child care expenses of $4,592 for his child Émilie Anctil at the Garderie Chatouille Inc.; [admitted]
c. during the year at issue the appellant had no earned income as defined in s. 63(3) of the Act; [denied]
d. the $4,592 is not deductible as child care expenses in calculating the appellant's net income for the 1994 taxation year. [denied]
3. Evidence
7 3.01 In addition to the foregoing admissions by the appellant he basically only made argument in an effort to explain why he contended that the money received from unemployment insurance for training and as child care allowances should be regarded as earned income.
8 3.02 His testimony is well summarized in the letter written to the respondent on June 8, 1995 (Exhibit A-1) and in his Notice of Appeal.
9 3.02.1 The letter of June 8, 1995 reads as follows:
[TRANSLATION]To whom it may concern:
This is to claim entitlement to deductible “child care expenses” under the Income Tax Act. In my 1994 tax return I could not claim anything as none of the definitions given corresponded to the situation in which I find myself as a taxpayer.
Having received unemployment insurance benefits under the “Self-Employment Assistance” component of the Unemployment Insurance Act, I feel I have suffered a tax loss on account of the “gap” which means that in my situation I cannot be treated as a worker, specifically as regards child care expenses (line 214). My argument is based on the following facts:
When the contract was signed with an authorized representative of the Unemployment Insurance Commission (Laurier C.E.C.), subsection 1(2) of the document “Self-employment Agreement, obligation of claimant” provides: for the purposes of paragraphs 1(1)(b) and (d) “full time” meansworkingat least 30 hours a week on development or implementation, as provided in the business plan. (See attached sheet)
Further, the Unemployment Insurance Commission, through its authorized representative, regarded this component “as work” since according to their directions in “Completion of UI claimant's reports”, in response to Question 1 on the claimant's report card: “Did you work during the period of this report?” the participant must answer “Yes”. (See attached sheet)
In short, this component of the Unemployment Insurance Act clearly states that this isworkand even gives support to the family through child care allowances.As I have had to incur significant child care expenses, amounting to $4,592.59, and have been allowed no deductions as the Income Tax Act contains nothing covering this work situation, and as the program has paid me from my unemployment insurance benefits taxable allowances entitled “child care allowance”, for all these reasons I object to the notice of assessment, though I initially completed my forms in accordance with the limits stated in the item “Calculation of child care expenses deduction for 1994”.
Accordingly, I would ask you to consider the amounts totalling $19,624 as earned income, enabling me to deduct my child care expenses.P.S. I am submitting the required forms and copies of other relevant documents regarding the deduction for the item “Calculation of child care expenses deduction for 1994”.
10 3.02.2 The appellant's Notice of Appeal, dated December 23, 1995, reads as follows:
[TRANSLATION]
RE: Appeal to the Tax Court of Canada under the INFORMAL PROCEDURE for the 1994 taxation year
TAXPAYER: JEAN LAMBIN
5324, rue Chabot
Montréal, Quebec
H2H 1Y8
Tel. (514) 524-4071
TAX OFFICE: Shawinigan Taxation Centre
To whom it may concern:
The purpose of this appeal is a review of the decision ratified by the Department of National Revenue, Taxation and originating in the aforesaid office. The mechanical interpretation (and application) of the facts does not in any way alter the loss I have suffered in respect of the entitlement to claim child care expenses under the Income Tax Act.
The government procedures that apply under the “Self-Employment Assistance” program of the Unemployment Insurance Act are incoherent to say the least and their effect on the taxpayer's tax return is unacceptable.
Under that program, instead of receiving special benefits a participant obtains regular unemployment insurance benefits for a fifty-two-week period in order to implement a business plan. Although this fact does not directly and a priori relate to the Income Tax Act, it is important to note that this component of unemployment insurance is fundamentally badly designed, it is inadequate and inconsistent with its own Act and Regulations, and according to the instructions given by its own representatives requires the claimant to “falsify” his periodic report (2 out of 5 questions) in order to comply with standard procedures and not have his card rejected from the system. Accordingly, if a component is so much out of line with its own system, going to the extent it does to get around its own rules, it clearly cannot take account of certain fact situations that involve another department, such as in this case the Department of National Revenue.
Besides this observation regarding irregularities in obtaining “regular” benefits, the anomaly has repercussions on the definition of supplementary benefits with respect to family support and child care expenses incurred in order to “work full-time” (as stipulated in the contractual agreement with this Department) in the operation of our business. These supplementary benefits (amounting to $4,300 of taxable income in my case) known as “dependent child allowances” are also regarded as regular benefits on form T4U, whereas they should appear in a different income box, both on the form issued by that Department and on its counterpart in the federal individual income tax return.
For example, note that the training allowances and related child care allowances issued by that Department and originating with those Employment Centres are themselves properly regarded in both cases as earned income, as recognized by the Department of National Revenue, Taxation.
This is a flagrant inequality since what is true for one is not allowable for the other ... even though these allowances for child care expenses are identical. Some may regard them as earned income, but not others, causing a serious loss to the taxpayers concerned. As I said above, this component was poorly designed in administrative terms at the outset. It is primarily intended for self-employed workers (the huge majority in this program) for whom all business income represents income earned by the taxpayer, which does not in any way penalize them in receiving “regular” benefits rather than “special” benefits. Further, in addition to the unjust consequence resulting for an incorporated business person with the Income Tax Act, this situation of dependent child allowances by extension involves another injustice for the taxpayer concerned. The government regards this income a priori as ordinarily taxable without taking into account, first, that these are not ordinary benefits but an allowance to pay child care expenses (which has nothing to do with the calculation used to arrive at the basic amount allowed the claimant weekly, an amount to which the allowance is added rather than being considered separately), and second, that the expense sina qua non which generates this income should logically be automatically deductible by the taxpayer.
From whatever angle this problem is considered, there is an obvious inequity in the rights of taxpayers depending on whether they are self-employed or the program in which they are participants, and it does not give them the same privileges in tax deductions, because a highly bureaucratic government system (unemployment insurance) cannot consistently adapt itself to its own peculiarities. My contacts with various local officials have produced no concrete solution or satisfactory response: they have represented themselves as powerless to correct this to say the least confused situation.
Muddles in the unemployment insurance system are one thing, but for the Department of National Revenue and its Income Tax Act to allow unequal rights is something else, and that is why I am now seeking satisfaction from the Tax Court of Canada in an attempt to deduct my child care expenses.
I look forward to hearing from you.
11 3.03 An explanation is given in Exhibit A-3 as to how the questions should be answered; the first two are:
Question 1
Did you work during the period of this report?
Question 1
Participants must answer “yes” to this question and write “SEA” in the box to indicate that they have “worked” under a SEA contract. When “SEA” is written in this space, participants are not required to complete A, B and C on the back of the form. However, if participants have occupied another job in addition to the SEA, they must write “SEA/OTHER” and complete, as indicated, A, B and C on side 2.
Question 2
Did you start a full time job during the period of this report?
Question 2
Participants who are still under a SEA contract must indicate “no”.
4. Act - analysis
4.01 Act
12 Paragraph 63(1)(e) of the Income Tax Act essentially provides that the total payment claimed should not be more than two-thirds of earned income for the year in question.
13 The definition of “earned income” is given in paragraph 63(3)(b) of the Act as follows:
63.(3)(b) “earned income”- “earned income” of a taxpayer means the total of(i) all salaries, wages and other remuneration, including gratuities, received by the taxpayer in respect of, in the course of, or because of, offices and employments,...
[(ii), (iii) and (iv) not applicable]
4.02 Analysis
14 4.02.1 Certain economic and social considerations prompted Parliament to create a “self-employment assistance” program that even includes payment for child care expenses, all within the scheme of the Unemployment Insurance Act.
15 In so doing Parliament did not intend to contravene the provisions of the Income Tax Act. Why is Parliament paying child care expenses under the Unemployment Insurance Act? Is it not for the very purpose of lightening the burden borne by the taxpayer as in the instant case? If the appellant had not received child care expenses under the Unemployment Insurance Act, he would not have received them under the Income Tax Act either. If they were also to be allowed under the Income Tax Act, would this not be duplicate payment for the same child care expenses?
16 4.02 The definition of “earned income” within the meaning of the Income Tax Act cannot apply to government assistance.
17 The appellant had no earned income in 1994. He cannot be allowed a deduction for child care expenses under the provisions of the Act.
5. Conclusion
18 For the foregoing reasons, the appeal is dismissed.
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