In August 2019, CRA released guidance on when an employee of a company, who is also a shareholder of the company, can deduct employment expenses on their personal income tax return.
But, before we get into those requirements, let's look at how this all started.
In about September 2017, CRA began asking employees of corporations, who were also major or sole shareholders of the corporations and who were claiming employment expenses, to support their claim for those employment expenses. They ended up reassessing those employees/shareholders on the basis that the expenses could not be a requirement of employment since the shareholder was not going to fire himself for refusing to incur those expenses.
In February 2018, after backlash from the public and the tax community and media interest, CRA backed down from the program and reversed any reassessments that had taken place. They also promised consultation with stakeholders in the tax professional community to provide clarification.
That clarification is as follows: if 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 Declaration of Conditions of Employment, however, the CRA could ask you to provide this 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 however, 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.
To satisfy this condition, you must therefore 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. This will support that you were required to pay the expenses to fulfill your obligations in your capacity as an employee.
You must satisfy both key conditions to deduct the expenses on your personal tax return. If both conditions are met, you may, as a shareholder, have the authority to certify Form T2200 Declaration of Conditions of Employment, for yourself or a related employee.
Tax planning between your corporation and shareholder(s) can be challenging and fraught with unforeseen consequences to both the corporation and the owner-managers. A CPA can help navigate ever changing tax legislation to ensure you stay compliant. Contact Ryan Rawluk, CPA, CGA or Eric Robert, CPA, CGA to get the proper advice.