2019-0804961E5 Child care expenses - Meaning of other remuneration

Principal Issues: Whether a dividend would be considered "other remuneration" for the purpose of paragraph (a) of the definition of “earned income” in subsection 63(3) of the Act.

Position: No.

Reasons: Based on jurisprudence, the allocation of a corporation’s profits to shareholders by dividends does not, in law, constitute remuneration for their work. Also, a dividend commonly constitutes return on capital which attaches to a share.

Author: El-Kadi, Randa
Section: 63(3)(a); 63(3)(d); 6(1)(c); 12(1)(j); 153(1)(a)

XXXXXXXXXX                                                                                2019-080496
                                                                                                        Randa El-Kadi
July 30, 2019

Re:  The child care expense deduction and earned income

Dear XXXXXXXXXX,

We are replying to your correspondence regarding the deductibility of child care expenses and our interpretation of the term “earned income” for the purposes of the child care expense deduction. You provide a scenario where a couple incurs child care expenses. You indicate that the spouse with the lower income is a 50% shareholder of a Canadian controlled private corporation, and is its only active shareholder and director. You add that, in their capacity of director, the spouse works XXXXXXXXXX hours per week on a regular and steady basis, for which they receive a regular dividend (not an eligible dividend).

You ask whether the particular dividend may be considered “other remuneration” that would count toward earned income within the meaning of subsection 63(3) of the Act. In your view, “other income” seems to encompass income from an “office” as this term is defined in subsection 248(1) of the Income Tax Act (the Act). Namely, this definition refers to the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration, and includes the position of a corporation director.

Our comments:

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Section 63 of the Act provides for the deduction of child care expenses in respect of an eligible child of the taxpayer, incurred in order to allow the taxpayer or their spouse or common-law partner to perform the duties of an office or employment, to carry on a business, or to undertake certain educational activities. In a two-parent family, the deduction, as a general rule, is available to the spouse or common-law partner with the lower income. A childcare expense deduction for a year cannot exceed two thirds of that individual’s “earned income” for that year.

The term “earned income” is defined in subsection 63(3) of the Act and refers to the total of certain amounts and types of income, of which we quote the relevant one to your query:

“(a) all salaries, wages and other remuneration, including gratuities, received by the taxpayer in respect of, in the course of, or because of, offices and employments, […]”

The term “other remuneration” is not defined in the Act for the purposes of section 63; therefore, it is to be given its ordinary meaning – namely, as a payment for services rendered. (footnote 1) Where a director of a corporation receives remuneration in their capacity of “officer,” as this term is defined in subsection 248(1) of the Act, the remuneration (usually in the form of director fees or annual bonus) is required to be included in computing the director’s income under paragraph 6(1)(c) of the Act.

Paragraph 153(1)(a) of the Act, in combination with section 101 of the Income Tax Regulations (the Regulations), requires any person paying salary, wages or other remuneration (with certain exceptions) to withhold and remit income tax in accordance with prescribed rules. Generally, the withholdings are in respect of Canada Pension Plan/Quebec Pension Plan contributions, employment insurance premiums, and income tax. For the purpose of tax deductions, the term “remuneration” is defined in subsection 100(1) of the Regulations and includes a payment that is in respect of salary or wages paid to an officer or employee. Pursuant to subsection 200(1) of the Regulations, the payer of an amount described in paragraph 153(1)(a) of the Act must report the payment on an information return in prescribed form. Therefore, where a corporation pays remuneration to its director in their capacity of officer of the corporation, the latter must report the payment - in this case, on a T4 Information Slip.

On the other hand, where a director of a corporation receives a dividend in lieu of director’s fees, it is our view that the nature of the amount received is altered, and so would be its tax treatment. This is because dividends are generally paid to shareholders as a return on their investment in a corporation. While director’s fees are computed as income from an office or employment under subdivision a of Division B of the Act, dividends are computed as income from property under subdivision b of that division. Generally, a dividend is reported on a T5 Information Slip. It is also of note that investment income and income from property are not part of the inclusions in “earned income” as defined in subsection 63(3).

The Supreme Court of Canada (footnote 2) has commented on the nature of dividends stating that:

“It is a fundamental principle of corporate law that a dividend is a return on capital which attaches to a share, and is in no way dependent on the conduct of a particular shareholder.”

We also share the view expressed by the Tax Court of Canada in Piuze et al v The Queen (footnote 3) in that:

“In law, the allocation of a corporation’s profits to shareholders by dividends does not constitute remuneration for their work, any more than that work constitutes consideration for dividends received.”

Therefore, in our view, dividends received by a shareholder of a corporation do not qualify as “other remuneration” for the purposes of paragraph (a) of the definition of “earned income” in subsection 63(3). As such, in a two-parent family where the low-income spouse or common-law partner is a shareholder whose income consists solely of dividends from the corporation, the family will generally not qualify for the child care expense deduction.

We trust our comments will be of assistance.

Yours truly,

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

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  See McNeil v. Canada, [1987] 1 F.C. 119, for the ordinary meaning of the terms “salary,” “wages” and “remuneration” in the context of subsection 5(1). It is of note, however, that a term may have different meanings in different contexts. The interpretative approach that is confirmed by the courts is that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.” – see E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87.
2  See Newman v. M.N.R., [1998] 1 S.C.R. 770.
3  See paragraph [32] of the decision in Piuze et al v The Queen, 2004 DTC 3182.

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