Question

it does not matter whether an individual is employed or self-employed since he or she can claim the same expenses under either category as long as the expense was incurred to earn income. Comment of the accuracy of this statement.

Answer 1

DEDUCTING EXPENSES AS AN EMPLOYEE

Employees are very limited in the expenses that they can deduct in calculating the tax they owe
to the Canada Revenue Agency (“CRA”). Self-employed individuals have much more
flexibility…they can basically deduct any reasonable expenses incurred to earn income from
their business. However, there are ways for “regular” employees to reduce their tax bills by tax
planning and structuring their employment arrangements appropriately.
This bulletin looks at the types of expenses you can deduct as an employee. Please note that it
does not examine deductible expenses if you are a self-employed individual (independent
contractor). There are differences in the rules for commission salespeople and the types of
strategies they can use to maximize their deductible expenses, and this bulletin will address
these issues. There are even special rules for artists, musicians and railway and transportation
employees that we will examine briefly.
WHEN ARE EXPENSES DEDUCTIBLE?

Under Canadian tax rules, employees can only deduct expenses that are specifically allowed.
Unlike individuals who run their own businesses, there is no general rule allowing them to
deduct reasonable expenses to earn employment income. This can make tax minimization a
challenge.
One basic test must always be met in order for any employee to be able to deduct expenses.
An individual must be required BY THEIR CONTRACT OF EMPLOYMENT to pay their own
expenses. This means that the employee needs to ensure that their employer signs Form
T2200 Declaration of Conditions of Employment certifying that this requirement indeed
exists. Fortunately, this is often not a problem. Employers are usually more than happy to
certify that employees are required by the terms of their employment to pay certain expenses
when this is the case and it enables the employee to deduct them for tax purposes.
The rules for commission salespeople are somewhat more generous. In addition to being
allowed to deduct certain expenses, they can deduct any reasonable expenses incurred to earn
income, such as commissions, which are based on the amount of sales they generate. To be
able to deduct expenses as a salesperson, the following tests must be met:

 You must be required to pay your own expenses by virtue of your contract of
employment;
 You must ordinarily be required to carry on the duties of your employment away from
your employer’s business location (e.g. at customer locations);
 Your remuneration must by wholly or partly based on commissions or other amounts,
such as bonuses which are calculated by reference to the volume of sales made or
contracts negotiated; and
 You are not in receipt of a tax-free travel allowance for your expenses or the allowance
is insufficient.If you are deducting expenses as a commission salesperson, there are a couple of points you should keep in mind. Firstly, you can only deduct expenses to the extent of your commission
income. If your expenses exceed this income, any excess is lost and cannot be transferred to another year to deduct against income earned in that year. Secondly, you can always deduct certain expenses as a regular employee against your salary. You only need to use the rules that allow you to deduct certain expenses as a commission salesperson if you couldn’t
otherwise deduct them as a regular employee. A good example of an expense that is only
deductible by a salesperson is meals and entertainment. Therefore, to minimize the likelihood
that your expenses will exceed your commission income, you should always deduct expenses
FIRST under the rules for regular employees, and then only use the rules for commission
salespeople if the expense is not otherwise deductible.
WHAT IS DEDUCTIBLE?

The following chart outlines the various deductible expenses, comparing what is deductible as
an employee with what is deductible as a commission salesperson. Additionally, we have
included a column for self-employed individuals. Keep in mind that they have the greatest
flexibility in deducting expenses, so at the end of this bullet, we will briefly discuss the possibility
of rearranging your affairs to become an independent contractor.

The following paragraphs explain many of the above expenses in more detail. Additionally, pay
special note to the section on home office expenses…the rules for this area are complicated
and the types of expenses that you can deduct vary depending on whether you are a regular
employee, a commission salesperson or an independent contractor.

Annual Professional Membership Dues

Suppose you are an engineer working for a large company. Every year, you must pay fees to the provincial Professional Engineers Association to maintain your professional status as a P.Eng. You may deduct these fees as an employment expense on your tax if you pay the feesyourself. If your employer pays the fees on your behalf, you cannot deduct them. This amount should be given as a non-taxable benefit to you, however if your employer does include the amount on your T4, then you can deduct this amount on your tax return.

Union Dues

Employees who are members of a union can deduct the annual dues they are required to pay.

Salary Paid to an Assistant

Sometimes, an employee can deduct the costs of hiring an assistant. This type of situation is quite unusual as most assistants are hired directly by their employer who will bear the costs. However, there are situations where it may make sense for an employee to hire an assistant.

For example, a mutual fund salesperson who is an employee makes a small base salary, but earns commissions based on the dollar value of mutual funds sold in the year. The more time this person has to meet clients and make sales, the higher their commissions will be. In this case, an assistant to be invaluable in performing administrative duties, thereby freeing up the salesperson to make sales and earn higher commissions. If the employer won’t hire the assistant, the salesperson could do so and deduct the costs of paying the assistant on their tax return, including CPP and EI premiums.Supplies Consumed in Employment Duties you may deduct supplies you have to pay for that are consumed in your employment duties such as:

 Paper

 Office supplies

 Long distance telephone charges

 Cellular phone airtime

 Internet charges based on usage

Travelling Expenses

Employees are allowed to deduct travelling expenses if they are required to pay these expenses under their contract of employment and they do not receive a tax-free allowance for these expenses. Remember, to claim meals and lodging, you must be away from your place of employment in excess of 12 hours. These rules also allow employees to deduct automobile expenses.

Capital Expenses

Capital expenses include any amounts paid for a capital asset. For example, office furnitureoffice equipment, such as computer, are capital assets. Businesses, including self-employed individuals, can deduct the cost of capital assets through a tax depreciation system call capital cost allowance (“CCA”). Generally, employees and commission salespeople cannot deduct expenses incurred for capital assets, with one main exception.

Rental Costs of Equipment/Telephone

Regular employees cannot deduct the cost of renting equipment, such as computer of office equipment. CCRA does not consider the rental payment to be a supply consumed in employment duties and therefore the cost is not deductible. The sale rationale also means that an employee cannot deduct the costs of renting a telephone line or purchasing cellular phone air time.

Interest Expense

You cannot deduct interest expense if you are an ordinary employee or a commission salesperson, except interest on a car loan. You can deduct the “business” portion of the interest expense if you are eligible to deduct automobile expenses. These rules do not apply to employees who receive reimbursement on a per kilometre basis.

Meals and Entertainment

Ordinary employees cannot deduct expenses incurred for meals and entertainment. Commission salespeople, however, can deduct 50% of these expenses against their commission income.

Office Rent/Home Office Expenses

An employee can deduct the cost of renting an office IF their employer requires them to pay for their own office space. It is much more common, however, for individuals to work for their employers out of a home office. You can deduct the cost of a maintaining a home office, as long as you pass one of the following two tests:

1. Your home office is the principle place of your employment: Basically, this means that you work more than 50% of the time from home. This can be a difficult test to meet for some employees who have home offices. For example, a commission salesperson might use a home office to perform their administrative duties.

However, since they are usually at customer sites, they likely won’t meet the 50% test and are therefore not eligible to deduct home office expenses. If you meet the 50% test, the home office does not have to be used primarily for work. It can be combined with personal living space. You would have to prorate the expenses related to your home office between its use for employment and its use for personal living space.

2. Your home office is used exclusively for employment purposes and is used on a regular and continuous basis for meeting clients, customers or patients: This test is designed primarily for individuals such as chiropractors, massage therapists and doctors – they might have an office where they usually work away from home, but they might also see clients or patients at home. These individuals can deduct home office expenses, as long as they use the office space exclusively in the employment duties (i.e. not part of their living space).

WHICH HOME OFFICE EXPENSES CAN YOU DEDUCT?

You can only deduct office in home expenses to the extent of your income (or commission income for commission salespersons). However, you can carry forward your home office expenses to a future year to reduce your income from that employment in that year.

PLANNING TO MAXIMIZE TAX BREAKS - As an employee, you are limited in what you can
do to maximize your tax breaks. However, there are some measures you should consider:
Become a Salesperson
Are you involved in sales? Do you often negotiate contracts on your employer’s behalf? If yes,
consider negotiating your salary package so that at least some of your income is based in the
revenue you produce. This could be as simple as receiving a year end bonus which is based on
the sales that you are responsible for. If you can rearrange your affairs, you will be eligible to
deduct expenses as a commission salesperson. Make sure that your employer reports your
commission or bonus separately as commission on your T4, otherwise CCRA will likely question
you expense deductions as a commission salesperson.
Consider the risks however. Are you willing to accept the risk that part of your remuneration
package will be based on the sales you produce? Consider the amount of expenses you
currently pay which would become deductible as a commission salesperson…if they are
minimal, it is probably not worthwhile to renegotiate your employment contract.
Become an Independent Contractor
Self-employed individuals have the most flexibility in deducting expenses. It may be possible to
rearrange your work arrangement so that you will be considered to be self-employed, rather
than an employee.
A few words of caution, however. You can’t simply state that you are an independent contractor
to be treated that way for tax purposes. There is a series of tests that are used by CCRA in
determining whether you are self-employed or an employee. For example, they look at a series
of questions relating to factors such as control, ownership of tools, chance of profit/risk of loss
and integration.
Consider a few things…Will you have significant expenses that will now be deductible? Are you
prepared to give up the perks of employment, such as pension, health and dental plans? Do
you want the protection of employment insurance, which is only available to employees and not
independent contractors? Is it even possible to change your relationship with current employer?..