There is a common question that accountants hear daily: can I deduct this expense? The general rule regarding deductibility is an expense must be incurred for the purpose of gaining or producing income. There are many intricacies to this general rule, and they vary depending on the type of income earned. Employment expenses are subject to many restrictions with a different set of rules applying to salary and commission income.
Generally, expenses are deductible if you were required to pay for the expense under your contract of employment, your employer did not reimburse you for the expenses and your employer has provided you with a signed Form T2200 Declaration of Conditions of Employment. On this form, the employer verifies the duties required of the employee, the expenses they were required to pay out of pocket and the amount of allowance or reimbursement received from the employer, if any. The employee must keep records to support the expenses claimed based on this form, such as invoices, receipts, bank or credit card statements, travel logs, and motor vehicle logs. Common expenses that can be claimed by all employees against their employment income include legal fees paid to collect or establish a right to collect salary or wages, allowable motor vehicle expenses, travelling expenses, supplies, salaries paid to a substitute or assistant, office rent, cell phone and home office expenses.
Motor vehicle and travel expenses have additional requirements. To be eligible to claim these expenses, the employee must be required to work away from the employer’s place of business or in different places and they must not have received a non-taxable allowance. An allowance is non-taxable if it is considered a reasonable amount for travel expenses, or if it is based on a reasonable per kilometer rate for motor vehicle expenses. Allowances that are not considered reasonable are taxable to the employee, and the employee can claim expenses accordingly. Employees can also choose to include a non-taxable allowance in their income and deduct expenses accordingly if the total expenses exceed the allowance received.
Motor vehicle expenses commonly include fuel, insurance, repairs and maintenance, license and registration fees, eligible leasing costs, eligible interest on a loan to purchase a vehicle, and capital cost allowance on a purchased vehicle. Employees should record their odometer at the start and end of each year. Throughout the year, they should keep a log of all trips taken for employment purposes. It is important to note that driving between your home and regular place of work should not be included. At the end of the year, this information is used to calculate the amount of expenses that can be claimed. Leasing costs, interest and capital cost allowance are subject to maximums based on the type of vehicle and amount paid.
Meals can only be claimed as part of your travel expenses if you are required to be away from the municipality that you typically work in for a period of at least 12 consecutive hours. The maximum claim is 50% of the lesser of the actual amount paid, or a reasonable amount. Reasonableness needs to be assessed on a case-by-case basis.
Home office expenses can be claimed if you meet one of the following conditions:
The work space is where you mainly (more than 50% of the time) do your work.
You use the work space only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.
The deductibility of home office expenses, and the calculation of the amount you are eligible to claim, requires further discussion and analysis. I would be happy to provide additional information on this area separately.
Employees earning commission income are often required to incur additional expenses in the course of their duties. Accordingly, these employees have greater flexibility in the deductions they can make compared to salaried employees. On top of the expenses previously discussed, commission employees can claim accounting fees paid to complete and file their income tax return, advertising and promotion expenses such as amounts paid for business cards or gifts, entertainment expenses such as meals, tickets and entrance fees to events, license fees and liability insurance premiums. Meals and entertainment expenses are subject to the 50% limitation discussed above.
Employees deducting expenses against commission income are limited to the amount of commissions earned. In certain situations when the total commissions are less than expenses incurred, it may be advisable to forgo the additional expenses available to commission employees and instead claim the full amount of expenses that would also be available to salaried employees.
Employees who work in the transportation industry, forestry operations, artists and tradespersons are often required to travel frequently for work and/or purchase specialized tools and equipment. Accordingly, these employees may be eligible for other deductions. We would be happy to provide additional information if this applies to you.
The deductions allowed against employment income are limited in comparison to other sources of income, such as business or property. However, every individual should aim to deduct every allowable amount that is available to them and keep proper records to support their claim.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA