Taxpayer couldn’t carry forward work expenses in recent case

Article content

If you incur various expenses for which you aren’t reimbursed by your employer, including expenses for a home office, you may be able to claim a deduction on your return for them. But what if your expenses are so large that they exceed your employment income? Are they still deductible against other income? Or can they be carried forward, and used in a future year?

Article content

Article content

Article content

That was the issue in a recent tax case decided earlier this month involving a Montreal investment adviser. But before delving into the details of this case, let’s review the basic rules regarding the deductibility of employment expenses.

To be entitled to deduct unreimbursed employment expenses, an employee needs to obtain a copy of a properly completed and signed Canada Revenue Agency Form T2200, Declaration of Conditions of Employment from their employer. A new and simplified version of this CRA form for the 2024 tax year was just released this week (more about that in a future column).

Typical deductible employment expenses (if unreimbursed) for salaried employees can include: allowable motor vehicle expenses, out-of-town travel expenses, parking (other than at your employer’s place of business), office supplies, salary for an assistant (if required by your employer), office rent, and home office expenses.

For salaried employees, if the allowable employment expenses are greater than the associated employment income, the net result is an employment loss, which can be applied against any other source of income for the year. And, if not used in the current year, it can be carried over to another year as a non-capital loss.

Article content

Article content

Employees who receive part of their compensation in the form of commissions, however, can deduct a broader range of “sales expenses.” These can include accounting fees, advertising and promotion expenses, and the cost of meals and entertainment when taking out clients. But the catch is that sales expenses claimed by a commissioned employee are limited to the employee’s commission income that year.

If an employee’s total commission expenses are more than the commissions received, the employee can choose to claim expenses as an ordinary salaried employee instead, in which case the employee’s expense claim isn’t limited to the commissions received in the year. Under this method, however, the employee can only claim the more restrictive list of employment expenses permitted for salaried employees.

The recent tax case involved a commissioned investment advisor who started a new job in September 2012. During the last few months of 2012, he incurred about $59,500 in employment expenses. During this period, he earned less than $2,000 in salary, and no commission income.

Article content

Since commissioned sales representatives are limited to deducting expenses against the commission income earned, and the advisor had no commission income in 2012, he claimed no tax deduction for that year. In 2013, however, he earned substantial commission income that far exceeded the $59,500 in expenses that he had incurred in 2012, and so he claimed a deduction of the $59,500 incurred in 2012 from that 2013 income.

The CRA reassessed the taxpayer’s 2012 and 2013 years. For 2012, the CRA did allow about $22,100 of the expenses claimed under the general employment expense rules for salaried employees, as discussed above. But for 2013, the CRA disallowed the remaining $37,400 ($59,500 less $22,100) in expenses on the basis that they were incurred in 2012, and simply could not be claimed in 2013.

The taxpayer tried to argue that much of his expenses were “pre-paid expenses,” such as hockey tickets, that were first incurred in 2012, but “used up in 2013.” The problem was that the taxpayer couldn’t specifically identify what those expenses were. As the judge wrote, “It is not really acceptable for a party to insist that they purchased something in 2012 and consumed it in 2013, while not providing evidence as to what exactly was purchased in one year but not consumed until the following year.”

Article content

The taxpayer then brought another argument, suggesting that the French version of the Income Tax Act provision governing commissioned employee expenses was more permissive, but the judge disagreed, finding that both the “English and French texts of the relevant provisions of the Act have the same meaning.”

The judge went on to explain that where the law wants to allow expenses to be claimed in years other than the years in which they were incurred, it explicitly provides for this in the Tax Act. For example, when it comes to the rules for deducting home office expenses, the Act says that these expenses can only be deducted up to the amount of employment income in that year. But it then permits any excess home office expenses to be carried over to the following taxation year to be deducted against future employment income in that year.

There is, however, no such equivalent wording in the Tax Act for expenses of commissioned employees, which can only be deducted in the year incurred.

Finally, the judge explained that employees typically include amounts in income when “received or enjoyed,” and that expenses can only be deducted when they are paid. Essentially, this means that taxpayers are required to report employment income on a “cash basis.” Citing Professor Vern Krishna’s classic tax tome Fundamentals of Canadian Income Tax, the judge noted that while cash accounting may present “a less accurate picture of profit than accrual accounting … Parliament has chosen to tightly control access to tax deductions for employees in order to protect the government’s revenue base and in the interests of administrative convenience.”

Article content

As the judge summarized, the specific words in the Tax Act governing expenses of commissioned employees state that an employee may deduct “amounts expended not exceeding the commissions … received by the taxpayer in the year.” This clearly limits deductions to expenses actually paid in the particular year, and are capped at the commission income received in that same year. The legislation does not give taxpayers the choice to compute income on a non-cash basis. As the judge concluded, “To find otherwise would frustrate the limit in (the Act) that the deduction not exceed the commission income ‘received’ in the year. The text, context and purpose of the provision all support that conclusion.”

The judge therefore dismissed the taxpayer’s appeal, and the excess employment expenses were found to be non-deductible.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

If you liked this story, sign up for more in the FP Investor newsletter.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content