2 September 1998 External T.I. 9813455 - DEDUCTION OF EMPLOYMENT EXPENSES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: employment expenses

Position: certain travel, vehicle and supplies are deductible. Meals in metropolitan area and books are not deductible. Entertainment costs are deductible only against commission income.

Reasons: section 8 makes no provision to deduct such expenses against salary income.

		981345
   XXXXXXXXXX 	N. Graham
(613) 957-8953

September 2, 1998

Dear XXXXXXXXXX:

Re: Employment Expenses

We are writing in reply to your letter of inquiry to the Vancouver Tax Services Office. Your inquiry detailed the circumstances of employees of XXXXXXXXXX. You asked whether certain expenses incurred by your employees would be deductible in computing employment income for income tax purposes.

Our Comments

The situations described in your letter appear to involve actual ongoing transactions involving specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions, we have set out some general comments that may be of assistance.

Employees are limited in the deductions they may claim against employment income. However, if the requirements of the provisions in the Income Tax Act (the “Act”) are met, certain travel, vehicle and supply expenses can be deducted. Interpretation Bulletins IT-352R2, Employee’s Expenses, Including Work Space in Home Expenses, IT-522, Vehicle, Travel and Sales Expenses of Employees, and IT-518, Food, Beverages and Entertainment Expenses, discuss these provisions in more detail and have been enclosed for your reference. While your letter was not specific, we have assumed your employees are paid a salary.

Specifically, you asked about the requirements to deduct the following types of expenses:

1. Motor Vehicle Costs

Employees may use their own vehicle when traveling to different client locations within a day. In some circumstances, an employee is able to claim an allowance from their employer calculated on a per kilometer basis. You have asked for our views on tax reporting when the per kilometer allowance paid by the employer at $0.28/kilometre is considered to be unreasonably low.

Is the employee allowed to deduct actual travel costs net of the amount reimbursed?

Motor vehicle expenses incurred by an employee can be deducted by an employee against employment income under subparagraph 8(1)(h.1) of the Act if all of the following are satisfied:

• the employee is ordinarily required to work away from the employer’s place of business or in different places. This must be a normal, and not occasional, part of the duties of employment;
• under the contract of employment, the employee had to pay their own motor vehicle expenses;
• the employee did not receive a non-taxable allowance for motor vehicle expenses; and
• the employee had a completed Form T2200.

With respect to the second requirement regarding the contract of employment, in our view, this requirement may be satisfied where it is tacitly understood by the employer and employee that transportation be provided by the employee. The determination of this will be a question of fact that must be resolved in each case. In general, the Courts have reviewed whether the failure to provide transportation could result in a cessation of employment, poor performance evaluation or other disciplinary action on the part of the employer.

It is a question of fact whether the allowance you refer to of $0.28/kilometre would be viewed as a non-taxable reasonable allowance for purposes of the third requirement. However, if determined otherwise, it is possible that the employer could include an unreasonably low allowance as income on the employee’s T4 slip. This, accompanied by a T2200 or a letter from the employer stating the allowance is unreasonably low,

may enable the employee to deduct actual, reasonable expenses of business travel from their employment income. Business travel does not include travel from home to work or work to home.

2. Cost of supplies used and consumed in the course of employment.

Employees may purchase, at their own expense, workbooks and academic materials, such as those purchased from a ‘Teacher’s Store’ or similar supplier, that would be used and in some cases reused in the course of the employee’s work with different clients.

For income tax purposes an employee can deduct the cost of supplies under subparagraph 8(1)(i)(iii) of the Act where:

• under the employee’s contract of employment, the employee had to provide and pay for the supplies;
• the supplies were consumed directly in the performance of the duties of the employment; and
• the employee had a completed Form T2200.

Similar to the provision of transportation, it is our view that the first requirement may be satisfied where it is tacitly understood by the employer and employee that the supplies be provided by the employee.

Supplies include pens, pencils, paper clips, stationary, stamps, maps and directories. A supply that is consumed directly in the performance of the duties of office or employment is something which is exhausted as it is used and cannot normally be used more than once (or a few times). Books are specifically not considered a supply for these purposes, as noted in paragraph 9 of IT-352R.

3. Other expenses in excess of reimbursements

Employees often must incur certain other expenses in the course of carrying out their duties of employment. These would include, for example, expenses such as travel, parking, attendance fees at public places such as community recreational facilities, restaurants, and social events. Contracts may often specify that the employee will take the client to community recreational facilities, restaurants and social events. On occasion, an employee may accompany a client on a vacation that would not otherwise be accessible to the client. The employee may receive reimbursement for some expenses or a portion of certain expenses. Other amounts are not eligible for any form of reimbursement.

Is the employee allowed to claim expenses in excess of the portion of the expenses reimbursed?

Under the Act, employees may deduct travel expenses within the requirements of subparagraph 8(1)(h) of the Act where:

• the employee is ordinarily required to carry on the duties of employment away from the employer’s place of business or in different places;
• the employee was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of their employment duties;
• the employee was not in receipt of a non-taxable allowance for traveling expenses; and
• the employee had a completed Form T2200.

The contractual requirements could be met as described above for vehicle and supplies expense, by a tacit understanding between the employer and employee. An allowance would be non-taxable as long as it is a reasonable amount and is for traveling away from the municipality or metropolitan area of the employer’s location where the employee normally reports to work.

In accordance with subsection 8(4) of the Act, the employee can deduct food and beverage expenses if away for at least 12 hours from the municipality or metropolitan area of the employer’s location where the employee normally reports to work. The amount actually deductible, by virtue of subsection 67.1(1) of the Act, will be 50% of the amount paid, or an amount reasonable in the circumstances, whichever is lower. Other amounts expended on meals would not be deductible.

Parking costs related to earning employment income can be deducted as long as the criteria detailed in ‘motor vehicle expenses’ are met.

Costs of admission to social events and community and recreation facilities appear to fit within IT-518R, Food Beverages and Entertainment Expenses. As noted in paragraph 18 of this IT, “the cost of the mere attendance at or experience of an event or service” falls within subsection 67.1(1) of the Act, and the comments in this bulletin. While the cost of tickets for theatre, concert, athletic events or other performances would be subject to the 50% limitation, or a lesser reasonable amount, these amounts are only deductible by employees who are commission salespersons and not salaried employees.

We would refer you to the Employment Expense Guide available at your local Tax Services Office for further discussion of these matters, in addition to the Interpretation Bulletins we have provided.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

encl.

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