Most people do not think about assisted reproduction and the tax system in the same thought, but the tax system is becoming increasingly intertwined with what has been called the baby business. You may not know it but the Canadian tax system provides significant tax support for those couples that require this kind of specialized medical intervention to create their families. This includes claiming expenses for assisted reproduction under the federal Medical Expense Tax Credit and various provincial equivalents. Quebec also used to fund IVF treatments as part of its provincial medical program, but recently halted this program due to its drain on its fiscal resources. Ontario and Alberta have also been flirting with funding IVF from tax revenues.
But a new issue is unfolding in the U.S. tax world related to assisted reproduction that may have interesting (well , at least from a tax nerd perspective) implications in Canada. An important area in assisted reproduction is the use of egg and sperm donors. In the U.S. both types of donors can be compensated, however the act of donating eggs vs. sperm is very different. I am sure we all understand how a male donor provides a sperm donation. It generally takes a quiet room, some stimulating visual materials, and a few minutes of the man’s time.
Egg donation is quite different. The act of extracting eggs from a donor’s ovaries is much more involved. It often begins with a suppression cycle to quiet the ovaries in the cycle before the retrieval. In the retrieval cycle, the women must inject herself multiple times every day for up to 14 days to stimulate the ovaries, with the aim to harvest approximately 15 mature eggs. Once those eggs are ready for harvesting, the woman is sedated (sometimes using general anesthesia) and the eggs are retrieved through a needle that passes through the vagina and into the ovaries. It is not a simple or pleasant experience, wrought with much physical and emotional discomfort both before, during, and after the retrieval. Many complications can occur along the way, including Ovarian Hyperstimulation Syndrome which can be serious enough to land the woman in the hospital.
Because of this, many egg donor contracts often include compensation for pain and suffering. The assumption up to last week was that under U.S. tax law, the compensation for pain and suffering was not taxable due to IRC Section 104(a)(2). The argument is that this compensation is not compensation for services, which would then be considered income under IRC Section 61 and hence taxable, but rather “on account of personal injuries or physical sickness” and hence not taxable.
Let’s be clear, in the U.S. compensation for donating your eggs or sperm is income for tax purposes. However, it was not clear if compensation for ‘pain and suffering’ from the egg donation process (and separate from whether or not any useable eggs are produced and ‘sold’) was a legitimate use of Section 104(a)(2). The IRS certainly disagreed and took the matter to the Tax Court which ruled on January 22, 2015 in the case of Perez v. Commissioner, 144 T.C. 4, 2015. The Tax Court decided that amounts paid to egg donors represent taxable income, regardless of the contract wording regarding the nature of the compensation.
The essence of the decision was that because the egg donor entered into the agreement before the injuries took place and the injuries were both known and consensual, the compensation was income under IRC Section 61.
Why is this important for Canada? In Canada, it is illegal to sell eggs and sperm under the Assisted Human Reproduction Act. However, it is well known that there is a black market for eggs. CRA, of course, does not care if you obtain income through illegal activities. In the eyes of the Income Tax Act even income from illegal activities is taxable. Not reporting compensation from selling your eggs in Canada is an act of tax evasion and subject to all the regular fines and penalties associated with tax evasion.
The Assisted Reproduction Act, however, is a very flawed document and does not seem to contain an explicit rules against ‘pain and suffering’ payments. If these payments occur in Canada as they are occurring in the U.S., what is their tax treatment?
Canada has a similar treatment for personal injury compensation as exists in the U.S. In Canada, the position of CRA is that compensation for non-pecuniary damages is non-taxable. However, it is clear that this treatment is for ‘damages’ and damages have been defined by the Supreme Court of Canada to be “monetary payment award for the invasion of a right at common law.” (Canson Enterprises Ltd. v. Boughton & Co.  3 S.C.R. 534 at para. 39, per La Forest J. ) As noted by the U.S. Tax Court, the pain and suffering from egg donation is both known and entered into consensually and unlikely to be viewed by CRA as non-pecuniary damages.
While it would be interesting to see such a matter go before the Tax Court of Canada, I believe the outcome would be the same as that which just unfolded in the U.S. That these payments are considered income for tax purposes. However, the added complication in Canada would be, if egg donors in Canada are receiving payments for pain and suffering and those payments are considered to be income, are such payments then also illegal under our Assisted Human Reproduction Act? If so, egg donors in Canada face a double whammy of an unexpected tax bill and fines and possible jail time under the Assisted Human Reproduction Act.
I’d be interested in hearing any legal views on this very grey and murky area.