How to justify employment expenses

If you’re a self-employed advisor and hire an assistant – be it your spouse or someone at arm’s length – as long as he or she actually performs the work and is paid a reasonable salary, you should have no trouble deducting the wages you pay.

The ability of an advisor who’s considered an employee to hire an assistant is, however, more limited. To be able to deduct the cost of an assistant’s salary, an employee must be “required” by the contract of his or her employment to pay for an assistant.

While the CRA’s administrative position is that the term “required” necessitates an “express requirement within the terms of a written contract of employment,” it acknowledges that such a requirement can still exist if the employee can establish it was “tacitly understood” by both the employee and the employer that the payment must be made and was necessary, under the circumstances, to fulfill the duties of the job.

A recent tax case decided last month (Li v. The Queen, 2009 TCC 530) involved insurance advisor Linzi Li’s 2006 tax return where she was reassessed by Canada Revenue Agency, which disallowed various employment expense deductions totalling more than $36,000. Of these expenses, approximately $14,000 related to a salary she paid to her husband, $7,000 to commissions she earned on the sale of her own life insurance policy and the bulk of the balance to automobile, entertainment and other expenses. While Ms. Li did not file a signed T2200 with her tax return, a signed form dated April 12, 2007 was later provided to the CRA along with an unsigned one dated March 27, 2007.

Mr. Li’s employer testified the unsigned T2200 dated March 27, 2007 is a standard form provided by the insurance company “with the answers typed in so they cannot be changed.”

It was therefore difficult to explain “how the (singed) form could have been changed… certain answers are different on that form and are contrary to the terms of (Ms. Li’s) employment.”

For example, the signed form indicates Ms. Li’s duties included selling investment funds, but the insurance company didn’t sell investment funds in 2006. A second discrepancy is that the signed T2200 indicates she was both required to rent an office away from the insurance company’s place of business and to pay for an assistant. This was contrary to her employer’s evidence which had no such requirement for Ms. Li in 2006 as it provided both an office for sales staff as well as administrative staff.

A third discrepancy between the two T2200 Forms was that the signed copy said Ms. Li was required to use a portion of her home for work while the unsigned copy from her employer says that she was not.

Ms. Li testified she paid her husband a salary to work for her as a telemarketer. His responsibilities were to call potential clients and set up appointments with Ms. Li. He testified he worked a total of 20 hours over 5 evenings per week and made between 100 and 200 calls each day. For this he was paid $15 an hour and was given a bonus of $50 when he landed an appointment for Ms. Li.

Under the Income Tax Act, an employee can only deduct the cost of a salary paid to an assistant if the payment of the salary was required by the contract of employment. The Judge concluded that based on Ms. Li’s conditions of employment in 2006, there was no requirement for her to “hire and pay an assistant, nor can it be said that it was an implicit condition of her employment that she do so.”

The Judge also had difficulty in allowing most of the motor vehicle expenses and the entertainment expenses on the basis that Ms. Li “failed to provide any documentation to support the expenses and that these expenses did not represent purchases used in her employment activities, nor were they incurred for the purpose of gaining or producing income from her employment as they were personal or living expenses.”

Finally, as discussed in last month’s AER column ( Life insurance commissions incur tax ), the Judge disallowed the $7,000 commission income deduction offset against the commission earned on a life insurance policy on her own life as “there are no provisions in (the Act) that allow such a deduction.”

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.