Principal Issues: [TaxInterpretations translation] Are certain expenses incidental to child care expenses incurred by a taxpayer deductible in computing the taxpayer's income?
Position: Questions of fact. Some expenses are deductible under section 63 of the Income Tax Act while others are not.
Reasons: Interpretation of the Income Tax Act.
XXXXXXXXXX 2005-011442
August 31, 2005
Dear Madam,
Subject: Request for technical interpretation: Childcare expenses
This is in response to your email dated February 3, 2005 in which you requested our opinion on the above subject. We apologize for the delay in responding to your question.
Question
According to your email, you work at the XXXXXXXXXX Childcare Centre and you wish to know which expenses constitute child care expenses under section 63 of the Income Tax Act (the "Act"). Specifically, you are inquiring as to the tax treatment of the following expenses in the context of preparing receipts to be provided to parents of children attending your daycare centre:
- Fees paid for childcare ($7 per day);
- Fees paid for additional child care services;
- Outings outside the daycare;
- Classes and activities given at the daycare;
- Parent-paid supply fees for bibs and mattress covers;
- Annual dues for parents who wish to be part of the daycare's Board of Directors;
- Fees incurred for breach of contract;
- Interest charges paid by parents who pay their bills late;
- Fees for sunscreen and insect repellent.
We are enclosing a copy of the Canada Revenue Agency ("CRA") publication entitled "Child Care Expense Deduction for 2004" which will provide you with additional information on section 63 of the Act. We are also enclosing a copy of Interpretation Bulletin IT-495R2 prepared by the CRA regarding child care expenses.
Analysis
In general, section 63 provides tax relief to taxpayers who, for example, in order to engage in paid outside employment, retain the services of a person to provide care for their child(ren) while they are at work. According to recent jurisprudence, section 63 allows the deduction of expenses "incurred for the purpose of caring for and protecting children".
Fee of $7 per day
Under Technical Interpretation F9803347, child care expenses of $7 per day that are charged to taxpayers living in Quebec are deductible from the taxpayer's income provided they satisfy the requirements of section 63. Although this expense is not deductible for Quebec provincial tax purposes, there is no restriction in the Act that would prevent a taxpayer from deducting those amounts in computing income for federal income tax purposes.
Fees paid for additional childcare
In Technical Interpretation E9430235, the CRA confirmed that fees for additional child care (where the parent picks up the child after official daycare hours) are child care expenses for the purposes of section 63, provided they satisfy the other requirements of that section.
Although this issue depends on the particular circumstances, it should be noted that those fees may also constitute business income to the day-care centre receiving them as well as employment income to the day-care centre's employees.
Outings outside the centre
The jurisprudence on this subject seems to be unanimous in the view that expenses incurred for recreational activities are not covered by the deduction provided for in section 63 since the purpose of those activities is not to look after the children in order to protect them and thus enable the parents to earn employment income. Indeed, the primary purpose of those activities is to ensure the development of the children's physical, social and artistic skills.
In other words, these outings are not primarily about looking after the children, as they are already in the care of a childcare worker. The absence of such activities would not prevent the parents from continuing to earn income from employment. We are therefore of the opinion that those expenses do not fall under section 63 and are therefore not deductible by the parents.
Costs incurred for breach of contract
In Technical Interpretation F2003-0183697, the CRA took the view that the phrase "an expense incurred...for the purpose of providing… child care services" found in subsection 63(3) was broad enough to include expenses incurred for the breach of a contract. This conclusion is valid as long as these costs are the result of an undertaking required of the parents in order for the child care to be provided.
The cost of sunscreen and insect repellent as well as bibs and mattress covers
As those costs are clearly associated with the care provided to children by your daycare centre, we are of the view that they are deductible by the parents pursuant to section 63.
Classes and activities at the daycare centre
As stated in the section above dealing with expenses incurred for outings outside the daycare centre, it is our view that the primary purpose of those courses and activities is not to provide childcare but rather to promote the cultural, physical and artistic development of the children. Thus, since the jurisprudence has interpreted section 63 to allow the deduction of expenses that provide for child care in order for parents to earn employment income, we are of the view that those expenses do not fall within the scope of that section.
Annual fees for parents wishing to be part of the Board of Directors of the centre and interest charges for late payments
We are of the view that the above payments are not expenses covered by the deduction available under section 63 since their primary purpose is not to provide child care for their protection. Of course, the annual dues that parents pay for membership on the board of directors allow the daycare to operate and thus provide childcare services, but the primary purpose of those payments is not to provide childcare but rather to participate in the management of the daycare centre.
Similarly, interest charges for late payments are charges that are not paid to provide childcare but rather to compensate the childcare centre when a parent fails to make a payment by the agreed date.
We hope that the above comments are of assistance.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Encl.