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Can the price of luxurious clothes, when worn to work by an worker of a high-end trend retailer, be a sound tax-deductible employment expense? That was the problem earlier than the tax court docket in a latest case heard final month.
The taxpayer labored for
from 1994 to 2019 as a chosen gross sales affiliate, and a model specialist for
. In her 2016, 2017 and 2018 taxation years, she deducted the price of luxurious clothes and varied dwelling workplace bills. The difficulty earlier than the court docket was whether or not she was required to incur these bills as a situation of her employment.
The Holts costume code required a “well-groomed and businesslike look” to determine credibility with clients. The taxpayer was anticipated to be entrepreneurial, aggressive and self-motivated and to ship extraordinary customer support.
Selling the manufacturers by carrying their merchandise was necessary to reaching gross sales targets, and the taxpayer achieved “Silver Elite” standing for 5 consecutive years, that means having at the very least $1 million of gross sales on the Bloor Avenue, Toronto location. The taxpayer was partly compensated by means of commissions on gross sales.
The taxpayer testified that the specialist designated gross sales affiliate program obligated her to put on distributors’ manufacturers, to realize and exceed gross sales standards. The specialist program doc submitted into proof included, amongst different issues, expectations to satisfy gross sales targets, together with demonstrating entrepreneurial initiative and management, and utilizing their clothes allowance to put on and promote the merchandise they symbolize.
To this finish, the taxpayer obtained a clothes allowance of $2,000 per season, for every of the 2 trend seasons every year. She was capable of buy commonly priced objects at half value, so the retail value equal of her annual clothes reimbursement was $8,000. She may additionally purchase objects that have been on sale with an extra one-third value discount, however the brand new inventory was by no means on sale at first of the season, so there was little incentive to buy sale objects since they might be out-of-date.
The taxpayer maintained that she needed to buy extra clothes at her personal expense, which she stated she wore solely for work, as a result of she felt that the clothes allowance was “insufficient.” The taxpayer believed that buying and carrying extra high-end clothes for work would assist her obtain larger fee earnings.
She testified that she bought and used high-end garments for work solely, and that put on and tear all through a gross sales season depleted the objects. She defined that her workdays concerned commonly going up flights of stairs and into an attic storeroom, and that it was potential “to hitch garments on edges within the storeroom and on the steel staircases.” She stated that broken garments couldn’t be reused, and that the garments wouldn’t be reusable year-over-year as a result of kinds change, and she or he wanted to stay “present.”
On prime of the clothes allowance, the taxpayer was reimbursed by Holts for bona fide employment-related bills, together with month-to-month mobile phone prices, taxi prices, and meals and lodging if travelling for work, for instance, to seasonal product data occasions.
The
denied the taxpayer’s clothes bills, saying they weren’t deductible as they have been private expenditures. When the taxpayer was audited, she tried to get signed
Form T2200 “Declaration of Conditions of Employment”
from Holts for every of the taxation years below assessment. The corporate refused to supply these types as a result of, in its view, she was not required to incur bills as a situation of employment. She was advised that firm coverage was in opposition to issuing T2200 types to workers and additional, in the event that they have been to subject her T2200s, they might not verify any obligation to incur employment bills.
The difficulty earlier than the court docket was whether or not the taxpayer was required, as a situation of her employment, to incur the bills. The courts have present in prior circumstances that this requirement could also be an categorical or implied situation of employment.
Whereas the decide discovered the taxpayer to be “credible and forthright,” including that when requested a query to which she didn’t know the reply, she admitted it, and “didn’t try and obfuscate or have interaction in prolix meandering,” nonetheless, the proof submitted at trial merely didn’t assist any requirement by Holts for her to purchase garments, at her personal expense, as a situation of her employment.
The decide even thought-about whether or not incurring employment bills was an “implicit criterion of employment.” This may be the case the place an worker may obtain a destructive efficiency analysis, or any disciplinary motion, for failing to take sure steps and incur associated bills. Within the current case, there was no proof regarding the taxpayer’s clothes that might assist an implicit requirement argument primarily based on any adversarial steps that Holts could have taken or threatened.
The decide famous that whereas “it might have been good for (the taxpayer) to decide on to incur bills on her personal account, over and above her allowance, to assist her earn extra commissions … making a sensible financial alternative and being contractually obligated (even implicitly) are completely different.”
Since there was no categorical nor implied time period of employment that required the taxpayer to incur the extra clothes bills, the decide discovered them to be non-deductible.
As for her dwelling workplace bills, the Tax Act
limits the deduction of home office expenses
until the house workplace is the place the place the taxpayer principally performs their duties, or the area is used solely for work and on a daily and steady foundation for assembly clients or different individuals associated to work.
The taxpayer testified that she labored unpaid hours at dwelling to maintain up with shopper issues, making calls and coping with reviews. For instance, on one event, she answered a name in the course of the night time about delivering a belt earlier than a shopper’s 7 a.m. flight. There was, nevertheless, no contractual requirement that the taxpayer work after common working hours, and any additional time labored was topic to pre-approval.
The decide concluded that because the taxpayer didn’t principally carry out her duties from dwelling, nor did she use the area commonly for assembly clients or others within the abnormal course of her work, her dwelling workplace bills weren’t deductible.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP is the Managing Director, Tax & Property Planning with CIBC Non-public Wealth in Toronto.
