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13 March 2012 External T.I. 2012-0433661E5 F - Notion de dépense engagée
Principal Issues: What does the term "expense incurred" mean for the purposes of the medical expense tax credit?
Position: Question of fact. According to the CRA's position, a taxpayer incurs an expense when the taxpayer has a legal obligation to pay a sum of money.
Reasons: Positions taken previously. Jurisprudence.
XXXXXXXXXX 2012-043366
March 13, 2012
Dear Sir,
Subject: Concept of expense incurred
This is in response to your fax of January 18, 2012, in which you asked for our opinion on the above subject.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
In particular, you refer to the announcement in the 2010 federal budget by the Minister of Finance (Canada) that surgical and non-surgical procedures designed purely to improve the appearance of a person would no longer qualify for the medical expense tax credit. That measure was applicable to expenses incurred after March 4, 2010.
Therefore, you wish to obtain the Canada Revenue Agency's ("CRA") interpretation of the term "expense incurred" and wish to know if, in the following three scenarios, the CRA considers that an expense has been incurred:
a) a payment was made before March 5, 2010, but the medical service had not been provided yet;
b) treatment was started before March 5, 2010, but the medical service had not been completed yet;
c) the decision to use a medical service was made well before March 5, 2010 but, due to waiting lists, the medical service was provided after March 4, 2010.
Our Comments
For the purposes of paragraph 18(1)(a), the CRA has indicated that a taxpayer incurs an outlay or expense where the taxpayer has a legal obligation to pay a sum of money. In the majority of cases, the legal obligation arises from the performance of the contractual obligations to which the payment relates.
In Wawang Forest Products Limited and Nerak Contractors Inc. v. The Queen, 2001 DTC 5212, Sharlow JA stated: [editorial note: the first quoted paragraph below is from Samuel F. Investments Limited v. M.N.R., [1998] 1 C.T.C. 2181, with which Sharlow JA did not entirely agree]
My understanding is that a liability to make a payment is contingent if the terms of its creation include uncertainty in respect of any of these three things: (1) whether the payment will be made; (2) the amount payable; or (3) the time by which payment shall be made. …
Returning to the Winter test, the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur.
We believe that the comments made on the concepts of "outlay or expense incurred" under paragraph 18(1)(a) can apply to expenses incurred for the purposes of the medical expense tax credit.
In the scenarios you described, it is not possible for us to conclude whether an expense is actually incurred by the taxpayer for the purposes of the METC. That being a question of fact, it would be necessary to determine when the legal obligation to pay a sum for medical expenses arises.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Trusts Section
Income Tax Rulings Directorate
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