2016-0654751I7 child care expense and SBJC

Principal Issues: 1) Can an employer of a nanny claim the employer’s share of the Canada pension plan contributions and the employment insurance premiums as child care expenses for the purposes of the child care expense deduction under section 63 of the Income Tax Act (“Act”)? 2) Is an employer in such a situation required to reduce the amount of child care expenses for any amount received as a small business job credit?

Position: 1) Yes, providing all conditions of section 63 are otherwise met. 2) Yes the small business job credit reduces the employer's share of the employment insurance premiums paid in respect of the nanny.

Reasons: 1) The definition of child care expense. 2) Under paragraph 63(1)(d), no deduction may be claimed for child care expenses for which any taxpayer is or was entitled to a reimbursement or any other form of assistance unless the reimbursement or assistance is included in a taxpayer's income and is not deductible in computing that taxpayer's taxable income.

Author: Shea-Farrow, Nancy
Section: 63 of the Act, 96 of EIA

                                                                                                                                             July 21, 2016

Dian Hardiman                                                                                                                     Income Tax Rulings
Senior Programs Officer                                                                                                       Directorate
Trust Accounts Programs Division                                                                                       Nancy Shea-Farrow
TSDMB                                                                                                                                 905-721-5099

                                                                                                                                             2016-065475

Re:  Child Care Expense Deduction

We are writing in response to your email that we received on June 22, 2016, enquiring about whether an employer of a nanny can claim the employer’s share of the Canada pension plan contributions and the employment insurance premiums as child care expenses for the purpose of the child care expense deduction under section 63 of the Income Tax Act (“Act”). In addition, you would like to know if an employer in such a situation is required to reduce the amount of child care expenses that they would otherwise claim under section 63 of the Act by any amount received as a small business job credit.

Employer’s share of Canada pension plan contributions and employment insurance premiums

Section 63 of the Act provides a deduction, in computing a taxpayer’s income for a tax year, for amounts paid for child care expenses incurred in respect of an eligible child of the taxpayer. The definition of a child care expense in subsection 63(3) of the Act requires that the expense be incurred to enable the taxpayer or a supporting person who resided with the eligible child at the time the expense was incurred to undertake specific activities as outlined in paragraph 1.9 of the Income Tax Folio S1-F3-C1, Child Care Expense Deduction (“Folio”).

Generally, a child care expense is an expense incurred in a taxation year for the purpose of providing child care services for an eligible child of a taxpayer in Canada. According to subsection 63(3) of the Act, child care services include babysitting services, day nursery services or services provided at a boarding school or camp. As noted in paragraph 1.14 of the Folio, this list is not all inclusive. For example, advertising expenses and placement agency fees incurred to locate a child care provider and mandatory registration fees may also qualify as child care expenses. The definition of child care expense also specifically excludes certain expenses as explained in paragraph 1.20 of the Folio.

In our view, providing that the salary or wages paid to the nanny is a child care expense that meets all of the requirements of section 63 of the Act, the taxpayer’s (that is, the employer of the nanny) share of the Canada pension plan contributions and the employment insurance premiums would also be child care expenses for the purpose of the child care expense deduction.

Small business job credit

The small business job credit under the Employment Insurance Act is a two-year measure that lowers small businesses’ employment insurance premiums from the legislated rate in 2015 and 2016. Generally speaking, an employer is eligible for the credit if certain conditions are met, including that the total of the employer’s employment insurance premiums paid in 2015 or 2016 is $15,000 or less.

As stated on the Canada Revenue Agency’s website, normally, if an employer receives this credit, it is reported as income or as a reduction to the employer’s employment insurance expense. However, when the employer does not carry on a business, such as when a taxpayer hires a nanny as an employee to provide a babysitting service in the taxpayer’s home for the taxpayer’s child, other rules may apply.

Under paragraph 63(1)(d) of the Act, no deduction may be claimed for child care expenses for which any taxpayer is or was entitled to a reimbursement or any other form of assistance unless the reimbursement or assistance is included in a taxpayer’s income and is not deductible in computing that taxpayer’s taxable income. The small business job credit would be considered a reimbursement or assistance that may be received by a taxpayer who directly employs a person to care for their child. Therefore, for the purpose of determining the deduction for child care expenses under section 63 of the Act, the employer’s share of the employment insurance premiums that are paid by the employer in respect of the nanny must be reduced by the amount of the small business job credit in respect of such premiums.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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