First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

TCC Clarifies child care expenses in Kwan

child care expensesKids are expensive. There’s no doubt about that. The Canadian government provides a small subsidy by allowing a limited amount of child care expenses to be deducted from income taxes.

In 2016, Mr. Kwan had a 10-year-old and a 12-year-old. He and his spouse enrolled their kids in a large number of activities, including chess programs, math tutoring classes, Chinese language classes, a ski class, and a summer camp. The couple also hired multiple babysitters to pick the kids up after their classes and mind them. Naturally, Mr. Kwan wanted to claim as much of these expenses as child care expenses on his income tax return as he could. [long]

The Minister of National Revenue reassessed Mr. Kwan and disallowed $5,086 of the expenses he claimed in 2016. Mr Kwan appealed the reassessment to the Tax Court of Canada (TCC) in Kwan v The Queen, 2018 TCC 184 on September 11, 2018.

Subsection 63(2) of the Income Tax Act defines “child care expenses” as:

an expense incurred in a taxation year for the purpose of providing in Canada, for an eligible child of a taxpayer, child care services including baby sitting services, day nursery services or services provided at a boarding school or camp if the services were provided

(a) to enable the taxpayer, or the supporting person of the child for the year, who resided with the child at the time the expense was incurred,

(i) to perform the duties of an office or employment,

(ii) to carry on a business either alone or as a partner actively engaged in the business, …

The trouble with that is that there has been some confusion on what a “child care expense” is. The TCC has produced a divided line of cases on whether to define “child care expenses” restrictively or purposively.

A purposive interpretation of “child care expenses” looks at the purpose for which the expense was incurred. Which means that the Kwan children’s activities would be “child care expenses”, so long as they were incurred for the purposes of allowing the parents to earn income. A restrictive interpretation excludes recreational or educational activities that are not explicitly listed in the above definition. The Kwans’ math tutoring classes would not be child care expenses under this definition. Both interpretations were argued in Kwan before Justice Pizzitelli.

Fortunately for Canadian parents, Justice Pizzitelli was inclined to follow the purposive interpretation of “child care expenses”. Justice Pizzitelli formally adopted a purposive test, allowing parents to exercise their discretion in selecting activities for their children. If the purpose of these activities is to enable the parents to work, they will be deductible (up to the relevant limit).

Both parents worked full time Monday to Friday. Even though the math tutoring, summer camp, and other activities were educational and recreational in nature, the evidence indicated that enrolling the children in these activities was for the purposes of enabling the parents to work. And thus, they were “child care expenses”.

Justice Pizzitelli considered the babysitters separately. Two of the babysitters were bilingual University students. These bilingual babysitters spoke in French to Mr. Kwan’s children and charged $5 more per hour for their services than their younger, unilingual counterparts. Justice Pizzitelli was not convinced to disallow the $5/hour premium for their services, and supported parental discretion:

“It is not for the state to decide who minds [Mr. Kwan’s] children as long as the expenses claimed are reasonable.”

The Canada Revenue Agency has since published a brief news release to get parents started: Back to school tax tips for parents.

 

By: Lex Klombies, Articling Student

Follow me

Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLPis one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
Follow me

Latest posts by Drache Aptowitzer LLP (see all)

Send to Kindle

, , ,

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload CAPTCHA.

This site uses Akismet to reduce spam. Learn how your comment data is processed.