Know the rules for expense write offs

The ability to deduct myriad business expenses is one of the biggest tax advantages of being a self-employed financial advisor as opposed to being an employee. That being said, there are still limits to what an advisor can legitimately deduct for tax purposes as B.C. advisor Hans Rupprecht recently learned in a Federal Court of Appeal decision (Rupprecht v. the Queen, 2009 FCA 314) released in October.

Rupprecht, a financial advisor during 1999 and 2000 (the years in question), was appealing a 2006 decision of the Tax Court of Canada, denying some of the expenses he claimed in computing his business income that were subsequently challenged by the Canada Revenue Agency.

Among the deductions originally denied by the CRA were Costco membership fees, amounts paid to clients to reimburse them for RRSP penalties, as well as business clothing.

Costco fees

Rupprecht deducted $48.15 to renew his Costco membership to permit him to shop for office supplies and other items used in his business. He didn’t renew this membership later because “he was able to obtain the necessary products and supplies at other stores.” The Tax Court judge found the Costco membership fees were indeed incurred for the purpose of earning income from his business and thus were properly deductible.

RRSP penalties

During the years in question, Rupprecht reimbursed various clients for RRSP penalties that were assessed for exceeding the then-foreign content limit of their RRSPs. This was done to keep his clients from moving their business to another financial advisor. Rupprecht cited a Supreme Court of Canada decision, which found penalties paid in furtherance of business purposes should be deductible. (The Tax Act was subsequently amended in 2004 to deny penalties from being deductible.)

The judge allowed these RRSP penalty reimbursements to be deducted since they were found to be reimbursements of amounts incurred by clients, which directly resulted from fluctuations in the value of securities in their RRSP accounts on which Rupprecht advised.

Clothing

The CRA disallowed more than $8,400 in suits, ties, shirts and accessories that Rupprecht purchased in 1999 and 2000, all of which were purchased at Ermengildo Zegna, an exclusive men’s wear boutique in downtown Vancouver. He testified he wore these clothes for his work as a certified financial planner and “only for work purposes.”

As Rupprecht stated, “We had put together an office in Langley and spent approximately $60,000 on it in 1997 or 1998” and he therefore needed “suitable clothing to go with the office.” As evidence, he entered a letter from a sales associate at the Zegna store in support of his position. He argued since the deduction of clothing expenses isn’t specifically denied under the Income Tax Act, it should be permitted.

The Tax Court found that “clothing is prima facie a personal expense” and the deduction of personal expenses is specifically prohibited by the Income Tax Act. As the Judge wrote, “Expenses relating to one’s personal appearance are the very essence of a personal expense and involve choices made by a taxpayer in preparing himself or herself for work. I conclude the clothing in issue was used by (Rupprecht) as personal wear in everyday business and therefore its cost is not deductible.”

The clothing expense was the main subject of the appeal to the Federal Court of Appeal in October. The Appeal Court, however, was not persuaded that the Tax Court judge “committed any reversible error with respect to the law, or any palpable and overriding error in applying the law to the facts or in making findings of fact.”

As a result, the FCA sided with the Tax Court in finding the business clothing not tax deductible.

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.