Employees are extremely limited in the types of expenses they can deduct for tax purposes. The rules are especially tricky when it comes to deducting a salary or other fees paid to an assistant. And the tax man may take a closer look when that assistant is your spouse, partner or other family member.
Salary paid to a family member is often done to income split, especially if the employee is in a high tax bracket and wishes to redirect income to a zero- or low-income spouse. The CRA (and, ultimately, the Tax Court) takes a dim view of such planning, even if the assistant is doing legitimate work.
Take, for example, a recent case on these issues (Blott v The Queen, 2018 TCC 1). Decided in early January, it involved a Calgary market dealer who deducted $12,000 in each of 2012 and 2013 as an employment expense for salary paid to his wife.
Under the Income Tax Act, for an employee to deduct expenses it must be demonstrated that the employment contract required the employee to incur the expense. Furthermore, the employer must certify this on Form T2200.
In the case before the Tax Court, the taxpayer’s employer paid for the taxpayer to have an assistant at the office. This assistant was shared with other employees. His employer provided the taxpayer with a T2200 in which it answered “no” to the question of whether his employment contract required him to pay for an assistant.
The taxpayer testified that his wife’s responsibilities included managing and auditing receipts and expenses; reconciling the expenses against the business charge card; paying the business charge card bill; expense receipt reconciliation; trailer fee auditing and reporting; income tax preparation; preparing gift boxes for promotional purposes; preparing and mailing celebration cards; preparing gift bags for promotional purposes; delivering promotional items; hosting clients in their home; seeking new client prospects at school, their sports club and other events; and networking.
The taxpayer insisted on more than one occasion that his wife’s performance of these services “was essential in allowing him to devote his efforts to building a customer base and earning his commission and bonuses.”
The taxpayer testified that the $12,000 claimed ($1,000 monthly) was “arbitrary,” stating that he felt it was “more than reasonable in comparison to the level of commissions he earned and the value he placed on her contributions.”
How the court saw it
One of the problems the judge identified was that the taxpayer did not actually pay his wife by cheque or any sort of fund transfer, as the couple had a joint account and “he did not see any practical sense in doing so.” His wife did report the $12,000 as income on her return, though he did not provide her with any T4 slips.
The two issues before the judge were: Was the $12,000 expense actually incurred as salary for an assistant and, if so, did it meet the legislative requirements for deductibility?
On the first issue, the judge noted that for a salary expense to be deductible, the amount must be “expended or paid.” In other words, was $12,000 paid or expended by the taxpayer?
There are were no cheques to his wife and the taxpayer’s income went into the joint account that his wife could simply access. As a result, the judge concluded that no amount was actually paid to his wife. While his wife, as a joint holder of the account, could withdraw whatever she wanted at any time, the judge did “not see how anything has been paid or expended.”
Worse, the salary expense was buried on the taxpayer’s return under “office equipment,” which led the judge to comment that it “raises the spectre of some concern regarding this alleged expense.”
The bigger issue was that even if the amount was properly paid, the taxpayer simply did not provide sufficient evidence of any employment requirement for him to hire an assistant. It didn’t help that his employer-completed T2200 said there was no such requirement.
The case is yet another example of how difficult it is for an employee to be able to claim a salary paid to a spouse or partner as a legitimate employment expense.
Jamie Golombek, CA, CPA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Financial Planning and Advice in Toronto.