Taxpayer couldn’t carry forward work expenses in recent case

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When you incur various expenses for which you aren’t reimbursed by your employer, together with expenses for a home office, you might be able to declare a deduction in your return for them. However what in case your bills are so massive that they exceed your employment income? Are they nonetheless deductible towards different revenue? Or can they be carried ahead, and utilized in a future yr?

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That was the problem in a recent tax case determined earlier this month involving a Montreal funding adviser. However earlier than delving into the main points of this case, let’s evaluate the essential guidelines relating to the deductibility of employment bills.

To be entitled to deduct unreimbursed employment bills, an worker must get hold of a replica of a correctly accomplished and signed Canada Revenue Agency Form T2200, Declaration of Situations of Employment from their employer. A brand new and simplified model of this CRA kind for the 2024 tax yr was simply launched this week (extra about that in a future column).

Typical deductible employment bills (if unreimbursed) for salaried staff can embrace: allowable motorcar bills, out-of-town journey bills, parking (apart from at your employer’s workplace), workplace provides, wage for an assistant (if required by your employer), workplace lease, and residential workplace bills.

For salaried staff, if the allowable employment bills are higher than the related employment revenue, the online result’s an employment loss, which may be utilized towards some other supply of revenue for the yr. And, if not used within the present yr, it may be carried over to a different yr as a non-capital loss.

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Workers who obtain a part of their compensation within the type of commissions, nonetheless, can deduct a broader vary of “gross sales bills.” These can embrace accounting charges, promoting and promotion bills, and the price of meals and leisure when taking out shoppers. However the catch is that gross sales bills claimed by a commissioned worker are restricted to the worker’s fee revenue that yr.

If an worker’s whole fee bills are greater than the commissions acquired, the worker can select to assert bills as an abnormal salaried worker as an alternative, through which case the worker’s expense declare isn’t restricted to the commissions acquired within the yr. Below this technique, nonetheless, the worker can solely declare the extra restrictive listing of employment bills permitted for salaried staff.

The latest tax case concerned a commissioned funding advisor who began a brand new job in September 2012. Throughout the previous couple of months of 2012, he incurred about $59,500 in employment bills. Throughout this era, he earned lower than $2,000 in wage, and no fee revenue.

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Since commissioned gross sales representatives are restricted to deducting bills towards the fee revenue earned, and the advisor had no fee revenue in 2012, he claimed no tax deduction for that yr. In 2013, nonetheless, he earned substantial fee revenue that far exceeded the $59,500 in bills that he had incurred in 2012, and so he claimed a deduction of the $59,500 incurred in 2012 from that 2013 revenue.

The CRA reassessed the taxpayer’s 2012 and 2013 years. For 2012, the CRA did enable about $22,100 of the bills claimed underneath the final employment expense guidelines for salaried staff, as mentioned above. However for 2013, the CRA disallowed the remaining $37,400 ($59,500 much less $22,100) in bills on the premise that they had been incurred in 2012, and easily couldn’t be claimed in 2013.

The taxpayer tried to argue that a lot of his bills had been “pre-paid bills,” resembling hockey tickets, that had been first incurred in 2012, however “used up in 2013.” The issue was that the taxpayer couldn’t particularly determine what these bills had been. Because the decide wrote, “It isn’t actually acceptable for a celebration to insist that they bought one thing in 2012 and consumed it in 2013, whereas not offering proof as to what precisely was bought in a single yr however not consumed till the next yr.”

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The taxpayer then introduced one other argument, suggesting that the French model of the Income Tax Act provision governing commissioned worker bills was extra permissive, however the decide disagreed, discovering that each the “English and French texts of the related provisions of the Act have the identical that means.”

The decide went on to elucidate that the place the regulation desires to permit bills to be claimed in years apart from the years through which they had been incurred, it explicitly supplies for this within the Tax Act. For instance, on the subject of the principles for deducting house workplace bills, the Act says that these bills can solely be deducted as much as the quantity of employment revenue in that yr. However it then permits any extra house workplace bills to be carried over to the next taxation yr to be deducted towards future employment revenue in that yr.

There’s, nonetheless, no such equal wording within the Tax Act for bills of commissioned staff, which might solely be deducted within the yr incurred.

Lastly, the decide defined that staff usually embrace quantities in revenue when “acquired or loved,” and that bills can solely be deducted when they’re paid. Basically, because of this taxpayers are required to report employment revenue on a “money foundation.” Citing Professor Vern Krishna’s basic tax tome Fundamentals of Canadian Revenue Tax, the decide famous that whereas money accounting could current “a much less correct image of revenue than accrual accounting … Parliament has chosen to tightly management entry to tax deductions for workers with the intention to defend the federal government’s income base and within the pursuits of administrative comfort.”

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Because the decide summarized, the precise phrases within the Tax Act governing bills of commissioned staff state that an worker could deduct “quantities expended not exceeding the commissions … acquired by the taxpayer within the yr.” This clearly limits deductions to bills truly paid within the explicit yr, and are capped on the fee revenue acquired in that very same yr. The laws doesn’t give taxpayers the selection to compute revenue on a non-cash foundation. Because the decide concluded, “To seek out in any other case would frustrate the restrict in (the Act) that the deduction not exceed the fee revenue ‘acquired’ within the yr. The textual content, context and function of the availability all help that conclusion.”

The decide due to this fact dismissed the taxpayer’s enchantment, and the surplus employment bills had been discovered to be non-deductible.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected].

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