Advisor’s expense claims get cold reception at Tax Court

This article appears in the February 2022 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

Financial advisors, especially those who are self-employed, can deduct myriad business expenses from their income for tax purposes. But if you’re overly aggressive, both in terms of the quantum and types of expenses you deduct, you could face a reassessment from the Canada Revenue Agency (CRA).

That’s what happened in a tax case (Yogeswaran v The Queen, 2021 TCC 90) decided late last year. The case involved an insurance advisor appealing the reassessment of her 2011 tax return, in which the CRA disallowed most of her claimed business expenses.

The advisor, who was also a full-time employee of an insurance firm, began her own side business selling insurance products in 2011. On her personal tax return for that year, the advisor reported gross business income of $62,075. Against this she deducted $60,509 in business expenses. The CRA reassessed her and only allowed business expenses of $11,021.

Meals & entertainment

The advisor produced approximately 104 receipts from 2011 totaling $3,170, mostly from fast food restaurants and coffee shops within the advisor’s geographic region, as well as five receipts totaling $372 for entertainment. None of these receipts had been written upon, or otherwise annotated, to show who was consuming the purchased food or drink, and for what business purpose. The advisor was unable to speak specifically to any of the receipts at trial.

Since she could provide no evidence identifying the business purpose of the meals, the judge didn’t allow any of these expenses.

Supplies

The advisor deducted $4,600 in “supplies,” of which the CRA only allowed $41.52. At trial, the taxpayer acknowledged that her amount was a “round figure,” saying that “some receipts were lost and other supplies had been paid for in cash.” Included among these expenses were $475 for a laptop and $186 for a cell phone, both of which are considered non-deductible capital expenses.

The judge concluded the advisor hadn’t purchased any supplies for business purposes other than the $41.52 that the CRA had allowed.

Salaries & benefits

The advisor claimed a “salary or wage” business expense of $5,800 paid to her teenage daughter for assistance with “cold calling” and organizing office paperwork. She stated that she paid her daughter $150 to $200 every two weeks. The amounts were paid in cash, with no receipts. No record was kept of the hours the daughter worked. Since she attended school full time during the week, most of the daughter’s work was done on weekends.

The judge disallowed this expense, quipping: “One may wonder to what extent cold calls made during weekends to sell insurance products would be well received, and how well versed the daughter might have been in leading an insurance sales pitch in the course of a weekend cold call.”

Telephone & utilities

The advisor claimed $4,228 for cable TV, telephone and internet. She admitted there was no business basis for claiming cable TV payments and blamed the inappropriate claim on her tax preparer.

The judge allowed 50% of the $760 of cell phone charges and 50% of the $421 in internet charges, accepting the taxpayer’s evidence that her business use of each service was approximately 50% of total usage.

Motor vehicle expenses

The advisor initially claimed $27,213 for motor vehicle expenses. The CRA conceded that 25% of her driving had been for business purposes and allowed $1,869 to be claimed. The agency denied her claim of $7,880 in vehicle repairs and maintenance after the advisor said the work had been done “on a cash basis without receipts being issued.”

She claimed car lease payments totaling $5,750 for one of her vehicles, but the advisor hadn’t actually leased the vehicle as the car was purchased. The amounts claimed were for her down payment and monthly financing payments. The judge refused to allow additional car expenses.

Business use of home

Finally, the advisor attempted to claim business use of home expenses totaling $11,965; the CRA allowed $1,873. The agency also denied the advisor’s claim of $18,000 toward the principal portion of her mortgage payments, but did allow mortgage interest. Her claim for $11,200 toward renovations of her basement and kitchen was denied, as such “work would not relate to the home office itself (a spare bedroom).”

While advisors can claim various legitimate business expenses, this case demonstrates that you must be prepared to substantiate both the amount and business purpose of any expense claimed.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at CIBC Private Wealth in Toronto

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.