If you incur various employment expenses for which you aren’t reimbursed by your employer, you may be able to claim a deduction for them on your tax return. But be careful, both with which expenses you choose to deduct and how much you claim, as your deduction may draw unwanted attention from the Canada Revenue Agency. That’s what happened with a life insurance salesman who ended up in court when his expenses were denied.
But before delving into the details of this recent case, which was decided last month, let’s review the basic rules regarding the deductibility of employment expenses. To be entitled to deduct unreimbursed employment expenses employees need to obtain a copy of a properly completed and signed CRA Form T2200, Declaration of Conditions of Employment, from their employer.
Typical deductible employment expenses (if unreimbursed) for salaried employees can include: allowable motor vehicle expenses; out-of-town travel expenses; parking (other than at your employer’s place of business); office supplies; salary for an assistant (if required by your employer); office rent and home office expenses.
Employees who receive part of their compensation in the form of commissions, however, can deduct a broader range of “sales expenses.” These can include accounting fees, advertising and promotion expenses and the cost of meals and entertainment when taking out clients.
The recent tax case involved a commissioned insurance salesman who was employed by the Royal Bank of Canada’s RBC Life Insurance Co. in the role of a wealth insurance adviser. His job was to sell life insurance, disability insurance, critical illness insurance, annuities and segregated funds.
The taxpayer joined RBC Life in 2010 and, during his time there, he distinguished himself as one of the company’s top sales performers, earning internal recognition as one of their “platinum” insurance advisers. For the years under appeal, 2013 to 2016, the taxpayer’s employment income (including commissions) was $331,910 (2013), $336,799 (2014), $423,981 (2015) and $394,069 (2016).
The taxpayer incurred various expenses that he considered to be related to his sales role and deducted them each year as employment expenses on his tax return. There were nine categories of expenses that were in dispute: subcontractor fees; assistant expenses; motor vehicle expenses; office supplies; “other” expenses; home office expenses; advertising; meals and entertainment; and parking. The total amount of expenses in dispute for each tax year was $177,371 (2013), $154,407 (2014), $137,254 (2015) and $175,788 (2016).
Halfway through the trial, the taxpayer and the CRA agreed on the treatment of most of the expenses that were in dispute. Under their agreement, the taxpayer abandoned his claims for additional assistant expenses, additional meals and entertainment expenses, additional office supply expenses and additional expenses under what the taxpayer had categorized as “other” expenses. In exchange, the CRA ultimately agreed to allow the taxpayer to claim automobile expenses of $8,104 (2015) and $9,417 (2016), home office expenses of $2,932 for each of 2015 and 2016, and parking expenses of $41 for 2016.
Thus, the judge was ultimately left to determine whether the taxpayer’s claims for fees paid to subcontractors were properly deductible. These were not insignificant, and made up the bulk of the taxpayer’s expenses, with him claiming $173,900 (2013), $120,000 (2014), $120,000 (2015) and $150,000 (2016) as subcontractor expenses paid in connection with obtaining leads for his insurance sales.
As it turns out, nearly all of the subcontractor fees were paid either directly to his spouse and his daughter (in 2013), and to a numbered Ontario company controlled by his spouse from 2014 to 2016. The amounts were paid “purportedly for … services towards generating sales leads,” the judge noted.
Under the Income Tax Act, a commissioned salesperson is permitted to deduct relevant expenses paid for the purpose of earning income, but only if, “under the contract of employment (the taxpayer) was required to pay (their) own expenses.”
The taxpayer argued that he had a “general understanding that any expenses he chose to incur for the purpose of generating commissionable sales” that were not reimbursed by RBC Life should be deductible.
The CRA argued that the Tax Act requires something more specific, namely an agreement between the taxpayer and RBC Life that listed the specific categories of non-reimbursed expenses he was expected to incur in connection with his sales role.
The CRA called as a witness a senior director with RBC Life who was the taxpayer’s direct supervisor in 2019 and 2020. She confirmed that RBC Life would neither require nor expect its sales agents to make bulk purchases of sales leads, nor hire people to assist with securing sales leads. She further testified that, to the contrary, RBC Life would be greatly concerned if its agents were not developing their own sales leads, since the company expected their sales agents to be tapping into their network of friends, family and other centres of influence, or actively expanding that network. Furthermore, the company wanted sales leads to be generated from within that network or through referrals from that network, and would not want their platinum sales force to be seen as going “rogue” by trying to make sales through cold calls to leads purchased from third parties.
Based on the director’s evidence, the judge concluded that not only did RBC Life not expressly agree that the taxpayer should not be incurring expenses toward having others generate sales leads for him, but that RBC Life would have told the taxpayer not to do so if he had ever asked them about it first.
Based on prior jurisprudence, the judge was obliged to restrict the taxpayer’s allowable employment expense deduction to those unreimbursed sales-related expenses that the taxpayer was either expressly or implicitly required by RBC Life to pay.
The judge went on to note that even if the taxpayer was implicitly required to hire subcontractors to generate leads, there were various irregularities with the payments made to his spouse, daughter and the numbered company. This ultimately led the judge to conclude that the taxpayer’s spouse and the company likely did not have the skill nor experience to produce either the quality and quantity of sales leads that would be useful. Rather, the judge speculated that the couple’s primary motivation for having the taxpayer make payments to his spouse and company was to shift income from his name into the hands of his spouse and company for tax purposes.