If you’re both a financial advisor and an employee, the types of expenses you can deduct are limited. Under the Income Tax Act, an employee can only deduct “the cost of supplies that were consumed directly in the performance of the duties of […] employment and that the […] employee was required by the contract of employment to supply and pay for.”
In other words, to deduct employment expenses, such as non-reimbursed supplies, your employer must certify that you were indeed required to pay those expenses on the T2200 Declaration of Conditions of Employment form.
Tax case Brown v The Queen (2017 TCC 237), decided in November 2017, demonstrates what can happen when expenses are claimed without proper documentation. The case involved the employment expenses of a regional financial advisor employed by a major Canadian bank. On his 2011 and 2012 tax returns, he claimed approximately $52,000 and $48,000 of employment expenses against employment income of $224,000 and $239,000, respectively—the majority of which was commission income.
His only permanent office was at home and he had a T2200 completed by the bank for each of the two tax years under appeal. The T2200 indicated that the bank required the advisor to pay for supplies, use a cellphone and use a portion of his home (“not more than 20% of the time”) for employment purposes.
The bank did not require him to rent an office away from his employer’s place of business or pay for an assistant.
The advisor testified that CRA had audited him twice and had accepted his claims for expenses for prior years. This time, he said, the situation was different because he claimed he lost all his supporting documents when his house flooded in July 2013.
The judge reviewed the expenses and denied most, for reasons explained below.
The advisor claimed advertising and promotion expenses of $8,347 and $6,876, respectively, for the 2011 and 2012 taxation years. He explained he had to give seminars and, for this purpose, he had to rent space at a convenient location and advertise the events. He kept no list of the clients to whom he allegedly advertised.
He also gave approximately $1,000 per year to employees of the bank as rewards for referring potential clients to him. This was done by purchasing gift certificates of less than $100 each. He also stated that these expenses were not reimbursed by the bank.
For 2012, he included advertising and promotion expenses he incurred with respect to a local soccer league where he coached.
The judge denied the majority of the expenses on the basis that they “were not incurred, or if incurred, were not incurred to advertise and promote his services at [the bank].”
Motor vehicle expenses
On his tax returns, the advisor claimed motor vehicle expenses totaling $13,915 for 2011 and $12,487 for 2012. He testified that he drove 40,000 km per year for business purposes and that his claim was based on $0.44 per km, which was the rate the bank used for its employees (though the bank only reimbursed him about $400 each year).
He failed to maintain a mileage log, a list of clients or potential clients he met and a list of the seminars he gave while away from home. Further, he didn’t submit any invoices showing his real fuel and maintenance costs.
As a result, the judge only let him deduct approximately $1,000 per year.
Meals and entertainment
The advisor explained that he took clients for lunch two or three times per week. He also claimed meals when he hosted seminars with prospective clients. These expenses totaled $6,615 for 2011 and $6,408 for 2012.
In the absence of receipts, credit card statements and a list of people the advisor “allegedly entertained,” the judge concluded that only about $1,500 in expenses per year were reasonable in the circumstances.
The appellant explained he would spend the night away from home if the roads were closed due to bad weather or if his seminars finished late; yet one of the expenses claimed was $554 to attend a football game in the U.S. It was agreed that this was non-deductible.
Supplies claimed on the advisor’s tax returns for the years in question included capital items such as computers, monitors and printers. In the absence of invoices, the judge only permitted about $500 for such expenses each year.
The advisor claimed “other expenses” totaling about $19,000 in each year. These included amounts paid to his son and daughter for “opening client files, preparing documents for his signature, conducting research on competitive products and organizing mail.” Some payments were made through cash payments and contributions to their RRSPs and TFSAs. The advisor alleged the amounts paid were reported as income in the children’s respective tax returns and they paid CPP contributions.
Unfortunately, the T2200 forms showed that the advisor’s employment contract did not require him to pay for an assistant. As well, he couldn’t prove that his children’s services were necessary for him to carry out his employment duties.
As the judge wrote, “Despite the fact that […] his children may have genuinely provided some assistance, he did not provide sufficient evidence to establish the element of necessity. [He] did not keep a record of the number of hours his children worked in any given year and he has admitted that the amounts paid to them were arbitrarily determined and have no correlation with the duties actually performed.”
Home office expenses
To deduct home office expenses, an employee must be “required by the contract of employment” to maintain such an office, as certified by the employer on the T2200. It must also be either where he “principally” (more than 50% of the time) performs his duties of employment or used exclusively to meet customers on a regular and continuous basis in the course of employment. This requirement must be certified by the employer on the T2200.
The bank did not require the advisor to use a portion of his home more than 50% of the time for employment, nor did the advisor use a portion of his home exclusively to meet customers on a regular and continuous basis.
Since the two conditions were not met, the judge did not permit him to deduct the $1,051 and $1,061 he claimed for the two years.
Based on the reasons outlined above, the total allowable employment expenses were reduced from approximately $52,000 to about $7,700 for 2011 and from roughly $48,000 to around $6,300 for 2012.
The common issue with many of the denied expenses was lack of documentation. While the advisor testified that his records no longer existed due to the flood, he was unable to produce photos of the damage or copies of the invoices for $40,000 of repairs done to his home. The judge concluded that the advisor’s testimony about the missing documents was not credible.
“The income tax system is based on self-monitoring and the burden of proof for deductions and claims rests with the taxpayer,” the reasons for judgment said. “The taxpayer must have detailed information available and keep documentation in support of the claims he makes.”