Employment and Commission Expense Claims
Expenses related to employment or commission based income, such as automobile, cell phone and salary paid to an assistant are key target areas for the CRA. For an employee to deduct these expenses, the employer must complete Form T2200-Declaration of Conditions of Employment.
To best mitigate any potential expense disallowance, keep a separate file folder for each expense category and place all applicable invoices in that file. For cell phone costs, clearly denote any personal calls on your phone bill and reduce your claim by these calls. Where you pay salary to an assistant, at minimum, keep a written job description and ensure you maintain payroll records. Where you pay salary to a family member to be your assistant, read this blog I wrote on paying salaries to family members.
The most contentious employment/commission expense claim is automobile expenses, specifically the percentage of business use versus personal use calculated by the taxpayer. Note your cars odometer reading at January 1st and December 31st, and keep a full and complete log book. This is the best evidence to support an auto expense claim. However, because the CRA knows that most people fail to heed this advice, they now offer to give some consideration to a logbook for a sample period, if you have kept a logbook for one consecutive 12 month period.
As the rules related to claiming investment interest expense are complex, the CRA often audits these claims. This is especially true where funds have been comingled and a line of credit (LOC) has been used for both investment and personal purposes.
Rental properties are yet another frequent target for audit by the CRA. They may question whether an expense is correctly categorized as a repair or an improvement to the property. An improvement needs to be capitalized and depreciated, while a repair can be expensed. The CRA’s basic position is set forth in Interpretation Bulletin-128R which states that if the repair betters the property, it may be considered capital instead of a deductible expense. When incurring a repair expense, you should consider the CRA’s “betterment” position, but the courts have considered repair expenses that are relatively minor compared to the value of the building as deductible.
For those who are self-employed, the CRA has almost no way to confirm your income and expenses without auditing you. Expect to be audited at some point in your self-employment working life. Follow the same advice offered above in regard to employment or commission expenses. However, self-employed people generally incur more marketing related expenses such as meals, sporting events, conferences, etc. Ensure that marketing-related receipts are marked with all pertinent details of the expense including the name of the client and the purpose of the expense. For conferences and travel expenses, provide back-up literature and lists detailing meetings you may have had with prospects, clients and suppliers.
The CRA has aggressively attacked any and all types of income tax shelters, save flow-through limited partnerships which are condoned by income tax policy. The CRA has been uncompromising on this issue. If your investment advisor pitches any kind of charitable donation scheme, Papaya Farm investment or similar type tax savings vehicle, turn and run the other way.
Taking the time to follow the preventive steps outlined above can help to mitigate both the financial pain and personal stress that can accompany an audit and income tax reassessment. Be organized and be prepared.