'School's out for summer" - a familiar refrain that is sure to be echoed
across the country this holiday weekend. As children begin enjoying their
holidays, parents are already finalizing their children's school and child care
plans for September.
An interesting tax case decided recently not only dealt with the specific
issue of the deductibility of child care fees but provides some insight as to
how somewhat vague and convoluted provisions of the Income Tax Act are to be
interpreted.
Dr. Doug Chan, a periodontist, and his wife, an orthodontist, live in
Windsor, Ont., on the Canada-U.S. border. They have two daughters, who in 2002
(the year in dispute) were five and two. Wanting "nothing less than the best
possible upbringing and education for their daughters" Dr. Chan enrolled his
eldest daughter at the Cranbrook School, in Bloomfield Hills, Mich.
Cranbrook is an exclusive private school situated on a lush 300-acre campus,
replete with streams, lakes, various sports facilities, a science museum and an
art gallery, with a five-to-one staff-pupil ratio.
Needless to say, such educational facilities do not come cheap. For the 2002
academic year, Dr. Chan paid over US$14,000 (equivalent to over $22,000 at the
time) to send his five-year-old daughter to senior kindergarten at Cranbrook.
Hoping to get some tax relief, Dr. Chan claimed a portion of the cost of such
tuition, within the allowable limits, on his 2002 tax return as a child care
expense.
While this is normally permitted, the Act specifies that child care expenses
must be incurred "in Canada." There is a specific exception, however, for
Canadians residing near the Canada-U.S. border. These individuals may be able to
claim U.S. child care expenses "if the child care services are provided at a
place that is closer to the person's ... residence ... than any place in Canada
where such child care services are available."
Dr. Chan, while acknowledging that child care was certainly available in
Windsor -- there is even a day-care facility on Dr. Chan's own street --
testified that no school in Windsor approaches the quality of Cranbrook and he
should therefore be entitled to deduct the cost of sending his daughter to
Cranbrook because of the literal wording in the Act -- specifically the word
"such" in the phrase "... such child care services..."
According to Dr. Chan, the words "child care services" are modified by the
word "such." As he explained, "if there are no child care services available in
Windsor that are of a standard equal to those child care services that he and
his wife chose to engage for their daughter in Michigan, then he is entitled
to... deduct the Cranbrook fees."
In other words, Dr. Chan was arguing that the word "such" refers not just to
child care services generally but rather to "services of the same outstanding
quality that he can only obtain for his daughter in Michigan."
The Judge, in trying to properly interpret the child care deduction section
of the Act, turned to the history and purpose of the section. Citing the
government's 1969 White Paper on Tax Reform, the purpose of the child care
deduction is to "assist many mothers [sic] who work or want to work to provide
or supplement the family income, but are discouraged by the cost of having their
children cared for."
As a result, the Judge found that the true purpose of allowing some U.S.
child care expenses to be deductible was "to relieve against the great
inconvenience that a few people living in border communities that have no child
care facilities would suffer if the requirement that child care facilities must
be supplied in Canada to be deductible were applied without exception.... It was
never intended to subsidize the well-to-do when they enroll their children in
upscale private schools in the United States."
Does that not therefore make the word "such," on which Dr. Chan based his
case, redundant? Perhaps, but according to the Judge, "it should be regarded
simply as a linguistic flourish."
Such Parliamentary flourishes, however, are clearly no consolation to Dr.
Chan, whose child care deduction was disallowed.