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Surrogate expenses not tax deductible

Andy Wong
Guest columnist
Monday, July 7, 2008

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There is a silly joke in the form of a convoluted formula proving girls are evil.

It starts off with the presumption that Girls = Time x Money. Since Time = Money, Girls = Money x Money. Because Money is the root of all evil, Girls = (Square root of Evil) x 2. A square eliminates a square root. Voila! Girls = Evil.

Google "Girls are Evil" and you'll see what I mean.

Not to promote tasteless jokes, but I wonder if similar reasoning was applied in a Tax Court judgment (Zieber vs. The Queen) heard in Lethbridge, Alta., earlier this month.

The Canada Revenue Agency had disallowed medical expenses of $2,987 claimed by the taxpayer in 2005.

The bulk of the expenses were legal fees paid to prepare an agreement for the birth of their child through a surrogate mother. The rest were travel expenses involved in the surrogate birth.

Generally, you are allowed to claim yours, your spouse's or a dependent's medical expenses. The CRA disallowed those expenses because there were not medical expenses allowed for in the tax rules, nor were they paid in respect of the taxpayer, his spouse or their dependent.

The judge laid out his decision methodically. He focused on the particular section of the Tax Act that could apply to the expenses. He referred to Section 118.2(1) (l.1) of the Tax Act, which, in plain language, says medical expenses include legal fees and travel expenses to have an organ transplant.

Is an embryo an organ? If it is, the legal fees and travel costs would be deductible because the transfer of the embryo to the surrogate mother's womb would be an organ transplant.

The judge pointed out an embryo is a human organism, as defined in the Assisted Human Reproduction Act.

He then referred to the Shorter Oxford Dictionary, 1973, which defines an organism as "an organized or organic system; a whole consisting of dependent and interdependent parts, compared to a living being."

The dictionary also defines an organ as "part or member of an animal or plant body adapted by its structure for a particular vital function ...."

Therefore, the judge ruled, the embryo transplant is an organ transplant because an embryo such as the one in question is adapted by its structure to grow into a complete human being, meaning an embryo is an organ because an embryo is adapted to grow into a person.

He allowed the expenses denied by the CRA.

It's debatable the dictionary defined the embryo as an organ. An organ (according to the dictionary) is part of a whole and performs a specific function.

Think of your liver or your eyeball. On the other hand, an embryo is a whole that grows up to be a person.

Should legal fees incurred in a surrogacy birth be an allowable medical expense?

It should, considering it's an inseparable component of this medical service.

Therefore, it's really no different than claiming travel expenses, which are allowable, if you have to travel to get medical services not available where you live.

The Girls = Evil logic behind this ruling strains credibility, which on one hand, undermines the CRA's efforts to apply current tax laws evenly. On the other hand, it's a push back to the CRA to use reason when assessing the grey areas, especially when an expense should clearly be deductible.

Andy Wong is a tax consultant at MacKay LLP, Chartered Accountants in Yellowknife. He can be reached at andrewwong@yel.mackayllp.ca.