In the United States, surrogate mothers receive fees of about $20,000 to $25,000 for their services. In Canada, the U.K., Australia and a number of other countries, commercial surrogacy is outlawed, but surrogates are compensated for expenses, for example, clothing, food, prenatal vitamins, childcare, travel costs, lost wages, medications, medical bills, etc. In the U.K., reported expenses range from £4,500 (in an arrangement that went awry) to £7,000-£15,000.
Compensation for expenses is not taxable income, but commercial fees are. There are, therefore, tax advantages to structuring a contract as "expenses" not "income."
The tax advantages arise because altruistic surrogates are compensated for expenses, such as lost wages or food, that would not be deductible for income taxes purposes. (Though surrogates might be able to claim food costs under Canada's "food as fuel" ruling.)
For example, imagine a surrogate receiving $15,000 as compensation for expenses. If this was structured as a commercial contract, she might have, say, $10,000 of allowable expenses, giving her $5,000 in net income. If she fits the typical surrogate profile (modest income, married, two children), she will face an effective marginal tax rate of 40% or more, stemming from income taxes (20%), Canada/Quebec Pension Plan premiums on self-employment income (10%), and loss of child tax benefits and sales tax credits (10%). Structuring the contract as "expenses" rather than a "fee" saves her approximately $2,000 (40% of $5,000).
Legal scholar Bridget Crawford has an interesting forthcoming paper on the tax treatment of surrogacy contracts in the US. She argues that, based on other legal precedents, surrogacy fees should be considered taxable income. Yet the limited evidence she could find suggests that most surrogacy agencies do not issue surrogates with tax forms (Form 1099, the US equivalent of a T4A), and most surrogates do not report their fees as taxable income:
I do feel I shouldn’t have to pay taxes for being compensated for helping a couple have a baby. What about all the needles, sticks, stretch marks and pain/suffering I went through?
Even when commercial surrogacy is allowed, surrogates and agencies treat the arrangement as an altruistic one for income tax purposes.
It is odd. The restrictions that we, as a society, place on surrogacy, reflect our deep-rooted discomfort with the practice. There are good reasons for that discomfort.
So why do we force surrogacy contracts to be structured in a way that, by exempting payments from taxation, effectively subsidizes the practice?
Bridget Crawford's paper is forthcoming in the book Challenging Gender Inequality in Fiscal Policy Making: Comparative Research on Taxation, edited by Åsa Gunnarsonn, Lisa Philipps, Kimberley Brooks, and Maria Wersig.
Worthwhile Canadian Initiative 
“Though surrogates might be able to claim food costs under Canada’s “food as fuel” ruling”
Interesting concept. I suppose if you could sell the tax court on the idea that a surrogate was carrying on a business of having babies (which might not be too hard, since for Canadian tax purposes, a business includes a one-off “adventure in the nature of trade”).
In fairness, the non-taxation of surrogacy expenses in Canada owes a lot to our concept of only taxing income from a source (i.e., employment, business, property, etc.). There is a small but curious subset of economic activities which somehow get left out of the tax net as a result of this doctrine (windfalls, surragacy expenses, gambling, hobbies, gifts, etc.). On the other hand, the CRA has occasionally had some success (though, not recently) going after professional gamblers on the basis that they’re carrying on a gambling business, so even in Canada, a professional surrogate could be subject to tax on her “expenses” (i.e., if here “expenses” were greater than her actual expenses) if the CRA were to successfully advance the position that she’s carrying on a surrogacy business. I guess if you’re a surrogate and the CRA comes after you, better tell them it’s your hobby.
“I do feel I shouldn’t have to pay taxes for being compensated for helping a couple have a baby. What about all the needles, sticks, stretch marks and pain/suffering I went through”
I wonder if anyone be sympathetic if it was the doctor who said: “I do feel I shouldn’t have to pay taxes for being compensated for helping a couple have a baby. What about all the years of medical school, crippling student loans, endless hours of low paid residency and pain/suffering I went through”. I mean, there are lots of people who have important, difficult and painful jobs/businesses, but who don’t escape tax on that basis.
I would also point out that CPP isn’t a tax. Benefits paid out from CPP are contingent on contributions. No contributions, no benefits. CPP isn’t Social Security. Direct payments for low-income seniors are paid through OAS and its related programs, which are funded out of general tax revenues.
Frances,
I was reviewing recent CRA income tax rulings when I saw one which reminded me about this post. In particular, the taxpayers were asking whether they could claim a medical expense tax credit in respect of fees and expenses paid to (or for) the surrogate mother.
Although the CRA concluded that they could not (probably correctly), they referred to a decision of the Tax Court of Canada (albeit a decision decided under the Tax Court’s informal procedure which is therefore not binding on the CRA) in Zieber v. R. (2008 TCC 328) in which the court accepted that certain expenses paid on behalf of the surrogate mother were valid expenses for the purpose of claiming a medical expense tax credit. The expenses were pretty reasonable (i.e., the actual cost of various examinations, legal fees) so that there really isn’t any income for the surrogate (though I have my doubts about the validity of the claim for lawyers fees as a medical expense. On one level, it is related to the medical procedure, but only in so far as it deals with the legal consequences of it. It isn’t, strictly speaking, medically neccesary, in that you could perform the medical procedure without it). Still, you wonder how far someone might try to stretch the expense concept to try to fit into this ruling (i.e., “the surrogate needed a luxury apartment, a flat screen TV and an SUV so that the fetus wouldn’t be stressed”, although I suspect your average tax court judge wouldn’t fall for that).
In any event, it’s an interesting extension of your point. Not only might the tax system subsidize surrogacy fees structured as expenses by not taxing the surrogate, it might subsidize such fees on the payor side, by providing a medical expense tax credit for them.
Bob, thanks for that, that’s really interesting.