If you are an employee of a business, you may have the opportunity to deduct expenses on your personal tax return that are required under your contract of employment. To claim work-related expenses, an employee needs to obtain a certified Form T2200 from their employer.
If you are a shareholder-employee of the company, can you deduct employment expenses?
Based on the Tax Court of Canada’s decision in the 2009 Adler case, the answer appeared to be no. The Tax Court ruled that a sole shareholder was not required by his company to incur expenses. The Tax Court’s decision resulted in the Canada Revenue Agency (CRA) issuing a series of reassessments in 2017 and 2018 that denied the claims of shareholder-employees who listed automobile and other costs as employment expenses on their personal tax returns. These reassessments were not received well by small business owners and their tax advisors. As a result, many complaints were filed with the CRA about the Tax Court’s ruling. This ruling led the CRA to undertake an employment expense review, which resulted in a clarification of the rules as they apply to owner-manager employees.
In advance of the 2019 personal tax season, the CRA shared the following information regarding what shareholder-employees need to know about claiming employment expenses.
When you are an employee and a shareholder, you must satisfy two key conditions before you can deduct employment expenses on your personal income tax return:
1. The expenses were incurred as part of your employment duties, and not as a shareholder.
If you are a shareholder, you must establish that the expenses were incurred in your capacity as an employee and not a shareholder. To do this, you must be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company or at other businesses similar to your company in size, industry, and services provided. You do not need to include this information on your tax return or the Form T2200. However, the CRA could ask you to provide this information later.
2. You were required to pay for the expenses yourself as part of your employment duties.
Usually, a written contract of employment specifies the expenses a non-shareholder employee must pay. Sometimes there is no written contract or the requirement to incur expenses is not clearly identified in the contract, but there is an implied requirement for the employee to pay the expenses. For example, an employee can demonstrate an implied requirement by showing they face possible disciplinary action from their employer if they do not meet the requirement.
If you are a shareholder-employee, an implied requirement may be more difficult to demonstrate, and a written contract may not be adequate to establish that you were required to pay for the expenses as part of your employment duties.
If you are a shareholder-employee and are unsure whether you meet the conditions to deduct employment expenses, please contact your McCay Duff advisor for advice.