Employee deductions and expenses as an owner-employee.
While employees at arms-length have been permitted to deduct certain employment expenses pursuant to section 8 of the Income Tax Act, the Canada Revenue Agency has taken issue with employees who are also shareholders of the corporate employer. That is, employees who are sole directors, shareholders and officers of the corporation have been increasingly scrutinized by the CRA.
Back in 2009, the case of Adler v. R, 2009 TCC 613 (informal procedure), the Tax Court of Canada held that since the appellant was the sole officer, director and shareholder of his employer, a refusal to incur the job related expenditures would yield no adverse consequences for him. On the basis of this reasoning, the Court dismissed the appeal.
So can I deduct my employment expenses?
It is arguable that this case should be limited to its facts and possibly not applicable in all situations. Firstly, the decision in Adler is silent on whether there was an employment contract in place explicitly requiring the employee to incur certain costs. Secondly, the Courts interpretation of “adverse consequences” is quite narrow indeed, appearing to be limited to an action for breach of contract, disciplinary action, and / or poor performance review – quite simply, this cannot be true as there may be negative financial consequences such as lost profits, inability to meet third party obligations, or the inability to pay salary to arms length employees.
What is required before I deduct employment expenses?
One thing is certain, section 8 of the ITA details some specific requirements before any employee can deduct certain employee expenses – among other things, a good starting point is to always have an employment contract with specific provisions detailing what are the requirements of the job is and what expenses the employee may be responsible for without reimbursement.
If you are a sole director, shareholder, and officer of a corporation and are considering becoming an employee of your corporation, let the lawyers at Erudite Law LLP assist you in reviewing your options. Please feel free to contact us – https://eruditelaw.com/#contact.