Employement | Canadian Tax Decisions & Tax Law

Commissioned Sales Employee Deductible Expenses

Perera v The Queen, 2014 TCC 280

The court had to determine whether expenses claimed by the taxpayer were deductible as employment expenses, and allowed some of the expenses.

FACTS

The Taxpayer was employed as a commissioned insurance sales representative. Though he had an office at the employers place of business, this was only to bring in clients. He was expected to work away from the office – either from home of his car – and his T2200 (Declaration of Conditions of Employment Form) stated that he was required to pay his own expenses, work away from the employer’s place of business, pay for a cellphone, and pay other expenses for which he did not receive reimbursement or an allowance.

The taxpayer claimed expenses for: Motor vehicle; Meals, beverages, and entertainment; advertising and promotion; parking costs; supplies; phone, car rental; and travel (on the 407).

ANALYSIS

Justice Lyons reviewed the applicable law. A commissioned sales employee, where required by the employer under a contract of employment to pay for the expenses incurred in the year in the court of employment, may deduct these expenses only to the extent allowed under Section 8 of the Income Tax Act.

Paragraph 8(1)(f) limits the deductions to the commission income earned – meaning that a loss cannot be created. Other conditions include:

The amounts must be expended by the employee in the year and for the purpose of earning income from employment;
the employee must be employed in the year in connection with the selling of property or negotiating contracts for the employer
the employee must ordinarily be required to carry on the duties of employment away from the employer’s place of business;
the remuneration must be wholly or partially through commission; and
the employee must not receive a non-taxable travel allowance.

Additional general limitations apply, including that the expense is deductible only if it was:

not an outlay, loss or replacement of capital or payment on account of capital;
not an outlay or expense that is not deductible pursuant to 18(1)(l) – maintenance of a yacht, camp, lodge, or golf course facility, or recreational, dining, or sporting membership fees or dues;
not an amount described in subparagraph 8(1)(f)(vii) in connection with standby charges for a vehicle; and
reasonable in the circumstances.

In looking for the purpose of an expense, the court has to look at the objective manifestations of purpose: Symes v Canada, [1993] 4 SCR 695; see also Arthurs v Canada, 2003 TCC 636. Particularly, in differentiating personal from business purpose, the SCC referred to the comments of professor Brooks:

If a person would have incurred a particular expense even if he or she had not been working, there is a strong inference that the expense has a personal purpose. For example, it is necessary in order to earn income from a business that a business person be fed, clothed and sheltered. However, since these are expenses that a person would incur even if not working, it can be assumed they are incurred for a personal purpose – to stay alive, covered, and out of the rain.

Motor vehicle expenses are permitted by paragraph 8(1)(h.1) where the employee is required to carry on employment duties away from the employer’s place of business, and required to in fact pay for those expenses incurred while traveling for employment purposes.

Supplies expenses are permitted by paragraph 8(1)(i)(iii) when the supplied were consumed directly in the performance of the employment duties and the employee was required to pay for the supplies.

Meals, beverage, and entertainment expenses are affected by paragraphs 8(4), 67.1(1) and (2), and section 67 – The meal must be consumed during a period where the employee was required to be away, for no less than 12 hours, from the municipality where the employer’s establishment to which the employee normally reports to is located; the amount must be reasonable in the circumstances; and the amount allowed is 50% of the lesser of the amount expended or a reasonable amount.

The court also noted that claims for large amounts of personal expenses can cast doubt on the claims for expenses by a taxpayer: Chrabalowski v Canada, 2004 TCC 644. The court concluded:

The cost for clothing and dry-cleaning, though necessary for the taxpayer to be well-groomed, is a personal-appearance expense related to personal choices in preparation for work – therefore non-deductible personal expenses;
expenses for vitamins, gym memberships, and spa treatments were admitted to be personal expenses, as were expenses for a vacuum cleaner, magic bullet, driveway sealing, his wife’s clothing, and the full amount of cable, home phone, and internet;
Expenses for a printer and laptop are non-deductible capital expenses;
claims for motor vehicle expenses are hard to claim without a vehicle log: Glawdecki v Canada, 2010 TCC 650;
single meals are personal expenses, and also the T2200 form indicated that the taxpayer was not required to be away from the municipality for more than 12 hours, therefore not deductible pursuant to subsection 8(4);
group meals and gift tickets to third parties were conceded to be 50% deductible;
Telemarketing expenses paid to a third party and proved by receipt were deductible;
All other expenses were not deductible.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Assessing whether Instructors were Independent Contractors or Employees

Robertson Human Asset Management v MNR, 2014 TCC 23

The TCC was faced with deciding whether Instructors at a college whose program served the retaining of workers injured on the job were employees or independent contractors of the taxpayer. The decision was in the context of the Employment Insurance Act (insurable employment) and the Canadian Pension Plan Act (pensionable employment).

The Court’s statement of the law applicable in classifying the relationship as an employment relationship (contract of service) or an independent contractor relationship (contract for services) is not novel. The TCC relied on the guidance provided by the Supreme Court of Canada in 671122 Ontario Ltd v Sagaz Industries Canada Inc, [2001] 2 SCR 983, and the Federal Court of Appeal in Wiebe Door Services Ltd v MNR, [1986] 3 FC 553(FCA). See also the FCA decision in Royal Winnipeg Ballet v MNR, 2006 FCA 87, and 875527 Ontario Inc v MNR, 2012 TCC 214. For some criticism of the classification of the work relationship using tort law principles, see Lara Friedlader, “What Has Tort Law Got To Do With It?” (2003) 51:4 CTJ 1467).

What is of interest is the Court’s “control” factor analysis (paras 20 – 37). The court appears to have put significant weight on the use of an internally created learning plan that served as a strict guideline for the education of students and the curriculum for each class. This guideline limited the discretion of the instructors and was directed by the Program Coordinator and developed after a detailed learning needs assessment of the student. The learning needs resulted in the creation of a sponsorship agreement with the Client of the taxpayer, and deviation from the sponsorship agreement terms was required for the receipt of funding for each student.

Although the overall determination of the nature of the relationship is likely correct, the Court’s comments with regards to the guidelines could be problematic. The TCC distinguished the facts of this case from those in R.B. Cormier Management Consultants Ltd v Canada (Minister of National Revenue), [1989] TCJ No 419. in Cormier, the limitation on the freedom of workers was imposed by a government manual which imposed specifications on Cormier. This was seen as being different from the limitations imposed by detailed learning needs analysis, the adherence to which was required for continued funding. One would wonder whether the outcome of this analysis would have been different if the learning needs assessment and the delivery of remedial education was conducted by two different corporations, rather than two divisions of one corporation. A legitimate and reasonable external limitation on workers freedom in performing services necessary for the appropriate delivery of those services ought to be seen in the same light irrespective of the source of the limitation, so long as it is binding on the service provider when delivering services through employees or contractors.

This and other decisions highlight the problem with making tax distinctions based on tax policy on the basis of tort distinctions for the purpose of tort policy. The Income Tax Act is designed in order to achieve certain policy goals, and the distinction between employees and independent contractors (those in business for themselves) is there mainly to increase the ease of administration by imposing withholding and prevent base erosion by limiting deductions. A more functional test for distinguishing between employees or contractors would ask questions that aim at drawing a distinction on the basis of the tax policy behind the distinction. Professor Neil Brooks as suggested such a functional test as consisting of considerations:

(1) For allowing deductions, by looking at:

whether the payment is substantially for services
whether the worker provides own equipment
whether the worker hires own helpers
the degree of financial risk undertaken by the worker
the degree of responsibility for investment and management by the worker
the worker’s opportunity for profit or loss in performance of duties

(2) For imposing withholding:

whether payor is a business person
whether most of the worker’s income is received from a small number of payors

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Commissioned Sales Employee Deductible Expenses

Instructors – Independent Contractor or Employee

Income Tax – HST/GST – International Tax