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Ensure you have proof of child care costs

I think that a little insanity in the workplace is actually a healthy thing. Consider the following ideas at your office: (1) Every time someone asks you to do something, ask them if they want fries with that; (2) Put your garbage can on your desk and label it "In"; (3) While making presentations, occasionally bob your head like a chicken; (4) Put up mosquito netting around your cubicle; or (5) Finish all your sentences with the words "in accordance with prophecy."

These things should be enough to have you labelled insane and create some laughs at the office. And if these things won't do it, I'll tell you what will: claiming child care expenses without any receipts as backup.

Okay, so this won't keep them rolling in the aisles at your workplace, but it'll get them howling at the offices of the Canada Customs and Revenue Agency.

Now that it's tax filing season, let's talk about child care expenses.
The Burns case

In July of last year, the Tax Court of Canada (TCC) handed down a decision in the case Burns v. The Queen, which serves as a wake-up call for those paying for child care: Documentation is key at tax time.

Tracey Anne Burns, a single mother of two, has always worked hard to provide a good home to her daughters without any child support. And in 1995, 1996 and 1997, Ms. Burns claimed child care costs on her tax return amounting to $8,000, $7,800, and $7,800 in those years respectively. The problem? Ms. Burns failed to provide proper receipts or other evidence of the costs incurred. Canada Revenue denied her deductions for those years. She appealed to the TCC. She lost.

Did the government truly believe that Ms. Burns incurred no child care expenses in those years, and therefore was entitled to no deductions? No way. But when her assessment was challenged, Ms. Burns' obligation was to produce clear evidence to support her claims. She was unable to bring the court any other evidence, including the child care providers, possible receipts, cancelled cheques or other records.

If the truth be known, several decisions of the TCC have held that a lack of documentation is not fatal to an appeal; however, Ms. Burns had to establish the expenditures with some precision. Ms. Burns was not even able to do this. She had pretty much guessed at the dollar amount of her child care expenses. Not a good thing.

Ms. Burns stated that some of her child care providers would not issue receipts and others initially promised receipts but backed out at year-end. She also stated that some receipts would reflect child care services that were not rendered by the alleged child care provider. Turns out that Canada Revenue did contact one of the child care providers to verify that services were provided, but that person denied baby-sitting for Ms. Burns.

Surprised? Don't be. It could have been that the woman did provide the day care, but wasn't reporting all her income earned, and so didn't issue receipts or confess to providing the services.

The onus was on Ms. Burns to show that Canada Revenue's assessment was wrong. While the court believed that she did incur some child care costs, she was unable to provide compelling evidence for her claims, and was unable to show that Canada Revenue's assessments were in error. What a shame.

The moral of this story? Always ensure you have receipts for your expenses. In the end, the courts may accept cancelled cheques as evidence of payment, but don't push your luck. And when it comes to child care expenses, never deal with anyone who refuses to issue you proper receipts (including their proper name, social insurance number, and the dollar amount) for the payments you make. Ask for the receipts monthly -- not at the end of the year. If they refuse to issue proper receipts, there's a good chance they're evading tax, and it can only hurt you in the long run.
The Bell case

One last point about child care expenses. A court decision in Stewart A. Bell v. The Queen has big implications on what you can and cannot deduct as child care expenses. In a nutshell, the court decided that payments for recreational and educational activities (skating or music lessons, for example) are not deductible as child care expenses. Based on this decision, expenses could be denied, even if the activities were undertaken during your working hours. The true objective of the activity has to be to provide child care.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2001 and Winning the Estate Planning Game. He is managing director of Tax Smart Services, at AIC Group of Funds.

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