Principal Issues: 1. Where an individual pays his sister to take care of his child while he is temporarily out of town for work, will the payments qualify for deduction as child care expenses? 2. Is the individual's sister an employee of the individual or self-employed?
Position: Question of fact. General comments provided.
Reasons: 1. One of the requirements to be eligible to deduct child care expenses pursuant to section 63 is that the expense must be in respect of a child who resided with the individual at the time the expense was incurred. It is a question of fact whether this requirement is met. The fact that an individual may be temporarily out of town for work, in and of itself, will not preclude the payments from qualifying as child care expenses. 2. If an employer-employee relationship exists, income tax, Canada Pension Plan contributions and Employment Insurance premiums may have to be withheld and remitted by the employer.
XXXXXXXXXX 2010-035734
May 6, 2010
Dear XXXXXXXXXX :
Re: Child Care Expenses
This is in reply to your email of February 10, 2010 requesting our views on whether amounts paid to your sister would qualify for the child care expenses deduction.
You advise that you have sole custody of your two year-old son who resides with you in a home maintained by you in XXXXXXXXXX . No one else supports your son or is responsible for him. You are considering hiring your sister, who is over the age of 17, to supply child care services at $XXXXXXXXXX per week while you work in XXXXXXXXXX for XXXXXXXXXX . After your temporary work assignment in XXXXXXXXXX , you will return to your home in XXXXXXXXXX . You would like to know whether the payments to your sister are deductible for income tax purposes and if you should be paying Employment Insurance ("EI") premiums and Canada Pension Plan ("CPP") contributions on her behalf.
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 Ruling, 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. However, we are prepared to provide the following general comments.
Section 63 of the Income Tax Act ("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.
One of the requirements to qualify as a child care expense is that the child care services have to be provided by a resident of Canada other than:
- the child's father or mother,
- a supporting person of the child,
- a person who is under 18 years of age and related to the taxpayer, or
- a person in respect of whom the taxpayer or a supporting person has deducted a tax credit under section 118 of the Act.
In your case, your sister would be considered an eligible child care provider as long as she is not one of the persons described above. For the purposes of the child care expenses deduction, a supporting person of an eligible child of a taxpayer for a taxation year means another person who resided with the taxpayer at any time during the year and at any time within 60 days after the end of the year and who is:
- the child's parent,
- the taxpayer's spouse or common-law partner, or
- an individual who has claimed a tax credit under section 118 for the child for the year.
Another requirement is that the expense must be for a child who resided with the taxpayer at the time the expense was incurred. In a situation where a parent has sole custody of a child who resides with the parent and there is no supporting person, it is our general view that the fact that the parent may be temporarily away from home for work will not, in and of itself, preclude the parent from claiming child care expenses provided all the requirements set out in section 63 of the Act are met. It is a question of fact whether the "resided with" requirement is met for any particular child care expense. Based on the facts described, we would consider the "resided with" requirement to be met in your case. As a result, you would be entitled to deduct child care expenses, subject to the specific requirements and limits in section 63 of the Act.
With regard to your question on EI premiums and CPP contributions, it is necessary to determine whether the person providing the child care services is an employee or self-employed. If it is determined that the service provider is not self-employed but an employer-employee relationship is involved, the employer may be have to withhold EI premiums, CPP contributions, and income tax and remit them to the Receiver General.
In determining whether an employer-employee relationship exists, the CRA will consider the amount of control the contracting parent has over the service provider's work. 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 time to the parent's child. 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, and 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 services. For more information, please refer to Guide RC4110, Employee or Self Employed? and Guide T4001, Employers' Guide - Payroll Deductions and Remittances.
We trust the above comments will be of assistance.
Yours truly,
Jenie Leigh
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch