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Advisors can deduct various business expenses for income tax purposes. But be warned: CRA is looking for people who push the limit.

Take the recent example of Mahes Perera (Perera v The Queen, 2014 TCC 280), who from 2003 until 2011 worked in Scarborough as a life insurance salesman for a major Canadian firm. When filing his tax returns for 2009 and 2010, he reported commission income of approximately $47,000 and $33,000, respectively, yet claimed employment expense deductions of about $28,000 in 2009 and $23,000 for 2010. At his trial, he produced 670 receipts he said he placed “into a drawer without organizing them.”

Perera also said he may have “mistakenly claimed some non-deductible personal expenses.” The key to determining if an expense is personal, rather than business-related, is whether you would have incurred it if you hadn’t been working. While it’s true that to work you need clothes, food and shelter, since these expenses would have been incurred if you weren’t working, they’re considered personal and therefore are not generally tax-deductible.

Included in Perera’s denied expenses were clothing from Giant Tiger, Walmart and Town Shoes, as well as dry cleaning expenses of $600 for suit jackets. While the judge acknowledged Perera “needs to be well-groomed for work, the expenses relating to one’s personal appearance relate to choices made by him in preparation for work […] and are non-deductible personal expenses.”

In addition, some of the 670 receipts were for vitamins; Go Transit; gym memberships; spa treatments for him and his wife; grocery items; a vacuum cleaner; a Magic Bullet blender (despite the fact that the receipt indicates it was returned); driveway sealing; women’s clothing; household items and the full amounts for his cable, home phone and Internet usage. Perera admitted during cross-examination “there could be or ‘may be’ personal expenses amongst the amounts in dispute that he has claimed.”

He claimed parking expenses of $1,500, yet admitted some of the receipts were for parking at or adjacent to his employer’s office. Since he could not prove these were not personal expenses as a result of driving to and from work, the judge disallowed the claim.

Under the heading of meals, beverages and entertainment, Perera deducted more than $2,000 in each year. For some of the expenses, he claimed he “often could only consummate a deal if he purchased lunch and sometimes a beverage.” He was often unable to provide names of clients with whom he had dined, and later admitted “some of the meals and alcohol may have been for family and friends.”

There were also receipts for single meals; for those, Perera claimed he would “consume the food and beverage while he was waiting for clients to show up at the restaurant.” An employee who’s required to be away for more than 12 hours from his or her employer’s location may claim meals during this period; however, form T2200, “Declaration of Conditions of Employment,” which was completed by his employer, showed there was no such requirement.

He also tried to claim purchases of alcohol from the LCBO and The Beer Store, testifying that “he would take a case of beer and meet clients to discuss insurance.” He later admitted that the whiskey and brandy on the receipts were for his personal consumption and that “ ‘maybe,’ depending on the day, there were receipts for other alcohol for his personal consumption.”

Perhaps the most questionable denied expense was the cost of movie tickets claimed as “entertainment for his clients.” In cross-examination, however, he could not explain how he ended up with his clients’ used tickets in his files.

by Jamie Golombek, CPA, CA, CFP, CLU, TEP, managing director, Tax & Estate Planning, CIBC Wealth Advisory Services.

Originally published in Advisor's Edge Report

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