Principal Issue: [TaxInterpretations translation]
Can an amount paid as a contract termination fee (penalty) by an individual to a daycare centre be considered a child care expense under the definition set out in subsection 63(3) of the Act?
Position:
Yes
Reasons:
It appears to us that the expression “expense incurred … for the purpose of providing … for an eligible child … child care services …” is sufficiently flexible to include contract termination fees paid by an individual to a daycare centre insofar as these fees arise from an obligation that is part of the agreement between the parties.
March 13, 2003
Quebec Tax Services Office Headquarters Client Services Division N. Deslandes, CGA (613) 957-8961
Attention: Mr. Marc Taylor
2003-018369
Request for technical interpretation: Childcare costs
I am writing in response to your fax of January 20, 2003, in which you asked for our opinion on the above subject.
You described a situation in which parents decided to stop sending their two children to the daycare centre with which they had signed a contract for the 2002 year. In order to break their contract, the daycare required them to pay a penalty for breach of contract.
You asked us whether those expenses qualified as child care expenses under the definition set out in subsection 63(3) of the Income Tax Act (the "Act").
OUR COMMENTS
The definition of "child care expense" in subsection 63(3) generally provides that it is an expense incurred for the purpose of providing child care services for an eligible child of a taxpayer.
In our view, expenses paid for breach of contract may fall within the definition of child care expense in subsection 63(3) if they relate to otherwise eligible child care expenses. It seems to us that the expression “expense incurred … for the purpose of providing … for an eligible child … child care services …” is sufficiently flexible to include contract termination fees where such fees were provided for in the initial agreement between an individual and a daycare centre that set out the commitments and obligations of each party. The daycare centre required such a covenant from the parents in order to provide childcare.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the CRA library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments of assistance. Should you require any further information on this subject, please do not hesitate to contact us.
Best regards,
Ghislaine Landry, CGA
Manager
Individual, Business and
Partnerships Section
Business and Partnership Division
Income Tax Rulings Directorate
- 2 -