Taxpayer couldn’t carry forward work expenses in recent case

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For those who incur various expenses for which you aren’t reimbursed by your employer, together with expenses for a home office, you could possibly 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 12 months?

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That was the difficulty in a recent tax case determined earlier this month involving a Montreal funding adviser. However earlier than delving into the small print of this case, let’s assessment the essential guidelines concerning the deductibility of employment bills.

To be entitled to deduct unreimbursed employment bills, an worker must receive a duplicate of a correctly accomplished and signed Canada Revenue Agency Form T2200, Declaration of Circumstances of Employment from their employer. A brand new and simplified model of this CRA kind for the 2024 tax 12 months was simply launched this week (extra about that in a future column).

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

For salaried workers, if the allowable employment bills are larger than the related employment revenue, the online result’s an employment loss, which will be utilized towards every other supply of revenue for the 12 months. And, if not used within the present 12 months, it may be carried over to a different 12 months 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 12 months.

If an worker’s whole fee bills are greater than the commissions acquired, the worker can select to assert bills as an unusual salaried worker as an alternative, wherein case the worker’s expense declare isn’t restricted to the commissions acquired within the 12 months. Beneath this methodology, nonetheless, the worker can solely declare the extra restrictive record of employment bills permitted for salaried workers.

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 12 months. 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 overall employment expense guidelines for salaried workers, 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 have been incurred in 2012, and easily couldn’t be claimed in 2013.

The taxpayer tried to argue that a lot of his bills have been “pre-paid bills,” corresponding to hockey tickets, that have been first incurred in 2012, however “used up in 2013.” The issue was that the taxpayer couldn’t particularly determine what these bills have 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 12 months however not consumed till the next 12 months.”

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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 clarify that the place the legislation needs to permit bills to be claimed in years apart from the years wherein they have been incurred, it explicitly offers for this within the Tax Act. For instance, in terms of the principles for deducting residence workplace bills, the Act says that these bills can solely be deducted as much as the quantity of employment revenue in that 12 months. Nevertheless it then permits any extra residence workplace bills to be carried over to the next taxation 12 months to be deducted towards future employment revenue in that 12 months.

There may be, nonetheless, no such equal wording within the Tax Act for bills of commissioned workers, which might solely be deducted within the 12 months incurred.

Lastly, the decide defined that workers usually embrace quantities in revenue when “acquired or loved,” and that bills can solely be deducted when they’re paid. Basically, which means 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 to be able 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 workers state that an worker could deduct “quantities expended not exceeding the commissions … acquired by the taxpayer within the 12 months.” This clearly limits deductions to bills truly paid within the explicit 12 months, and are capped on the fee revenue acquired in that very same 12 months. 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 12 months. The textual content, context and objective of the supply all assist that conclusion.”

The decide due to this fact dismissed the taxpayer’s enchantment, and the surplus employment bills have 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. Jamie.Golombek@cibc.com.

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