Date: 19991220
Docket: 98-2581-IT-I; 98-2555-IT-I
BETWEEN:
MARILYN D. SLAWINSKY and
M. SLAWINSKY PROFESSIONAL CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
[1] The appeals were heard on common evidence.
ISSUES:
[2] The issue with respect to M. Slawinsky Professional Corporation ("the Corporation") is whether the Corporation can, for income tax purposes, deduct an amount equal to wages paid for "nanny" services in respect of the child of Marilyn D. Slawinsky ("Slawinsky"), an employee of the Corporation, enabling her to be free from child care duties and to earn income for the Corporation for its 1995 and 1996 taxation years.
[3] The issues with respect to Slawinsky are:
(a) whether Slawinsky received a benefit from the Corporation pursuant to the provisions of the Income Tax Act ("Act")[1] in respect of such payments for her 1994 and 1995 taxation years;
(b) if so, whether the benefit was provided by the Corporation to Slawinsky in her capacity as a shareholder under section 15 or as an employee under section 6; and
(c) if so, whether the Minister of National Revenue ("Minister") correctly assessed the value of the benefit.
[4] A sub-issue relates to the Corporation's 1994 taxation year. The disallowance of the sum of $7,203 to the Corporation, in respect of such expenses for its 1994 taxation year, reduced its amount of loss otherwise incurred in that year that could be carried forward to its 1995 year. The parties are agreed that if the Corporation succeeds in its appeal, the 1994 loss will be increased by this amount. A discussion of this arose during the hearing because the assessment for the Corporation's 1994 year was a nil assessment from which no appeal could be brought. The Corporation applied for a Notice of Determination of Loss for that year. Correspondence from Revenue Canada indicated that such computation could not be made because the appropriate documents had been forwarded to the Department of Justice for the conduct of this case. The resolution of this matter will follow the decision in this case.
FACTS:
[5] The Corporation's fiscal and taxation year end was January 31 in each year. Slawinsky was the sole shareholder of the Corporation which was incorporated to and did provide legal services. For all material purposes Slawinsky, a lawyer, was the sole shareholder and only lawyer employee of the Corporation. It paid wages to nannies who cared for Slawinsky's child[2]
[6] The Minister of National Revenue ("Minister") reassessed the Corporation disallowing amounts paid to the nannies of $15,340 and $15,740 for its 1995 and 1996 taxation years. The Minister also reassessed Slawinsky adding those amounts to her 1994 and 1995 taxation years. On objection by Slawinsky, the Minister reassessed to allow child care expenses of $5,000 for each of the 1994 and 1995 taxation years.
[7] Slawinsky testified that the main areas of the Corporation's practice were litigation, primarily in divorce and personal injury and, subsequent to the years under review, divorce and family law. She stated that the primary source of profits of the Corporation was fees for legal services rendered based on an hourly rate for services provided by Slawinsky. She said that her child was born on March 6, 1993 at which time she was not married and was not living with anyone. She stated that her son lived full-time with her during the period and that she had essentially the full obligation and responsibility to provide for him.
[8] She testified that she provided legal services for the Corporation at irregular hours because she did a great deal of court work. She stated that personal injury work and divorce work with custody matters necessitated services
...in the middle of the night, on week-ends and so on. Restraining orders have to be done on very short notice and so on.
[9] Slawinsky stated also that she was involved in legal actions in nearly all the judicial districts of Alberta and routinely in Edmonton, Calgary, Drumheller, Wetaskiwin, Lethbridge, et cetera. She testified further that she went regularly to legal education seminars outside Red Deer and regularly ended up working late at night, often without knowing in advance that she would be required to do so. She said that sometimes she would be tied up in court and that other emergencies would arise such as her being served with a Notice of Application to be heard the next day. She stated that she worked evenings and week-ends when required. She said also that,
It's very critical to the business that the corporation carries on that I am available to clients for that type of service.
[10] She also testified that when the child was born, day-care institutions would not take infants under the age of two. She also said that if a child was sick, other arrangements had to be made. She said that the institutions had limited hours of work and that children had to be picked up by a certain time and dropped off by a certain time. She stated further that quite frequently the institutional services were not available on week-ends or evenings. She then said that for those reasons the Corporation decided to hire a nanny.
[11] Slawinsky also said that the nannies provided care for her child, that being their first priority. She said they did some housekeeping work, if time allowed, but it was neither expected nor required. She said that there was no meal preparation for her or anyone else in the household except the child. She stated that they did no errands or shopping or anything of that nature and that, in fact, one of the nannies had no driver's license or vehicle. She stated further that nanny services were not available to other employees of the Corporation.
ANALYSIS AND CONCLUSION:
[12] The celebrated case of Symes v. Her Majesty the Queen, 94 DTC 6001 is the leading authority respecting deductibility of child care expenses by the individual who paid them. That case involved a woman lawyer who sought deductibility of the full cost of employing a nanny to care for her pre-school children to enable her to engage in the practice of law. She, herself, was practising law and was not the employee of a corporation providing legal services. The Supreme Court of Canada determined that her deduction would be limited to the amounts authorized by section 63 of the Act. At page 6020 Iacobucci, J. said:
... a straightforward approach to statutory interpretation has led me to conclude that the Income Tax Act intends to address child care expenses, and does so in fact, entirely within s. 63. It is not necessary for me to decide whether, in the absence of s. 63, ss. 9, 18(1)(a) and 18(1)(h) are capable of comprehending a business expense deduction for child care. Given s. 63, however, it is clear that child care cannot be considered deductible under principles of income tax law applicable to business deductions.
That section provides a measure of tax relief to a taxpayer who, in order to pursue a gainful occupation away from home or to receive education, must pay someone to look after children while he or she is at work or at school.
[13] Respondent's counsel referred at length to the extensive analysis by Iacobucci, J. in Symes. His comments were made in the factual context that existed in Symes, namely that Symes personally paid child care expenses to enable herself to be free to practice law. That is not the situation in this case. The corporation is a separate entity and it made a decision to pay the nanny expenses. The fact that it is not at arm's length with Slawinsky cannot blur the issue of deductibility. Non arm's-length relationships are substantially, for tax purposes, tied to valuation considerants.
[14] Section 63 has no application to the Corporation since it clearly refers only to the deduction of childcare expenses paid by the taxpayer for the care of a child of that taxpayer. As the learned Justice said in Symes, at page 6014:
The analytical trail leads back to its course, and I simply ask the following: did the Appellant incur child care expenses for the purpose of gaining or producing income from a business?
[15] Accordingly, the first question to be determined is whether such expenses are deductible by the Corporation by virtue of the provisions of section 9 and section 18(1)(a) of the Act. The Corporation is a separate legal entity from Slawinsky and is not to be confused with her or amalgamated with her in the analysis of the issues.
[16] Section 9 of the Act includes in income "profit" from a business.
[17] In determining profit, paragraph 18(1)(a) is a general prohibition respecting deductions. It prohibits the deduction of any outlay or expense that is not made or incurred for the purpose of gaining income from business or property. In Royal Trust Company v. M.N.R., 1957 C.T.C. 32 at 44 the President of the Exchequer Court said:
Thus, in a case under the Income Tax Act, if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business, its amount is deductible for income tax purposes.
[18] The Supreme Court of Canada considered paragraph 18(1)(a) in B.C. Electric Co. Ltd. v. M.N.R., [1958] C.T.C. 21 (S.C.C.). The Court observed, at page 31, that virtually all expenditures of a business enterprise are made for the purpose of earning income. They might, however, be prohibited from being deducted by some other section of the Act.
Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made "for the purpose of gaining or producing income" comes within the terms of [paragraph 18(1)(a)] whether it be classified as an income expense or as a capital outlay.
Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income, in order to compute the income tax liability it must next be determined whether such disbursement is an income expense or a capital outlay.
[19] This is clearly not a capital expenditure, no asset or advantage for the enduring benefit of a trade having come into existence.[3]
[20] Respondent's counsel referred to the learned Justice's statement in Symes that it may be relevant in a particular case to consider whether a deduction is ordinarily allowed as a business expense by accountants. He said, in this regard:
Similarly, it may be relevant to consider whether the expense is one normally incurred by others involved in the taxpayer's business. If it is, there may be an increased likelihood that the expense is a business expense.
[21] Since this is the first case with this fact situation to be taken before a Canadian Court, and since no accounting evidence was adduced with respect to whether such expenses are "normally incurred by others involved in the taxpayer's business", the learned Justice's comments are not of assistance to the Respondent's case.
[22] I accept Slawinsky's evidence that she provided legal services to the Corporation at regular and fairly irregular hours and intervals. The Corporation had no source of revenue other than from her services.
[23] However, an employee's remuneration is normally determined without regard to that employee's costs incurred to be presentable. The cost of care of an employee's children, as are other expenses associated with preparing an employed person to present himself or herself at work, is essentially personal in nature. Iacobucci, J. discusses this question in some detail in Symes. At page 6010 he refers to Bowers v. Harding (1991) 3 Tax Cas. 22 (Q.B.) in which engaging a household servant "to enable his wife to have time to perform her duties as a schoolmistress" was tantamount to other obviously personal expenditures, the cost of that servant being disallowed as a deduction. Although the Iacobucci, J. said that he did not feel that he must "slavishly follow those cases which have characterized child care expenses as personal in nature", he does not reject that basic proposition. He also, at page 6011, referred to B.J. Arnold's treatise, The Deduction for Child Care Expenses in the United States and Canada: A Comparative Analysis (1973) in which the author said:
The test established by the case for distinguishing between personal and living expense involved a determination of the origin of the expense. If the expenses arose out of personal circumstances rather than business circumstances the expense was a non-deductible personal expense.
Although Iacobucci, J. states that such conclusion is subject to attack he does not reject that premise.
[24] It can be argued that the Corporation incurred the nanny expenses solely for the purpose of gaining or producing income. However, as stated above, Slawinsky had to be able to present herself to the employer to perform her employee services. Such presentation includes expenditures for numerous items and services that are personal in nature. One of these is child care.
[25] Accordingly, I conclude that the nanny expenses, per se, were not amounts paid by the Corporation for the purpose of gaining or producing income. However, because I conclude that they are included in Slawinsky's income under paragraph 6(1)(a) of the Act as
... benefits ... received or enjoyed by the taxpayer ... in respect of, in the course of, or by virtue of an office or employment ...
they may be deducted by the Corporation. The result is the same as though those sums were paid by the Corporation to Slawinsky with her paying equal amounts to the nannies. In essence, the Corporation made payments on her behalf, the value of the benefit to Slawinsky being equal to the amounts paid by the Corporation.
[26] Slawinsky's appeals for the 1994 and 1995 taxation years, but for the allowance of the amounts of $5,000 in each such year under section 63 of the Act, will be dismissed without costs.
[27] The Corporation's appeals will be allowed with costs.
Signed at Ottawa, Canada this 20th day of December, 1999.
"R.D. Bell"
J.T.C.C.