Tax Season COLUMN: Are your employment expenses an eligible tax deduction?
Steve Bennett
Senior Tax Professional
H&R Block
Smiths Falls, ON
It’s not all that uncommon to hear stories from co-workers who write off their phone bills, home expenses, or even vet bills. Some of these may be eligible expenses, but many certainly are not. Unfortunately, these incorrect tax deductions can be perpetuated when CRA does not identify them immediately. Since Canada’s tax system is self-reporting, many of these errors can go on for years before the taxpayer is audited by CRA. At that point, the taxpayer will owe the tax difference plus interest, which can add up pretty quickly – and, depending on the severity of the omission, penalties may apply.
To avoid any difficulties down the road, it’s important to understand the conditions under which employees can deduct expenses. The employee must have paid for the expenses, been contractually required to pay the expenses, and been employed in an occupation eligible to make the claim. For instance, a commission employee can claim entertainment expenses whereas a salaried employee cannot.
Before the deduction can be made on the tax return, the employer must complete form T2200, Declaration of Conditions of Employment. By completing this form, the employer certifies that the employee is contractually required to pay for certain expenses. When completing the tax return, Form T777, Statement of Employment Expenses, must be completed. This form contains a breakdown of each expense category and calculates the total eligible expenses. The total is then carried to Line 229 as a deduction.
Since employment expense deductions can provide significant refunds, they are regularly audited by CRA. One of the key defences against a CRA audit is documentation. It’s a given that receipts are needed to support a claim, but record keeping becomes a little more complicated in the case of automobile expenses. With automobiles, there is usually some personal use, so a logbook, detailing all travel related to employment, must be maintained – this is a key piece of documentation that many employees do not retain. Using the logbook, the ratio of employment vs. total use is determined and that ratio is used to calculate the amount of vehicle expenses eligible to be claimed. If 55% of all kilometers driven were related to employment, then 55% of all gas, maintenance, insurance, etc. would be an eligible employment expense.
For most Canadians, employment expenses are not an eligible deduction – simply because we do not incur any of the expenses that are specifically allowed. For the common expenses encountered by most employees, the government provides the Canada employment amount which is a credit equal to the lesser of total employment income and $1,127. That usually works out to a refund increase of $169.05, which often seems like a small consolation prize, but every little bit helps!
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by Steve Bennett or H&R Block Canada, Inc.
Image source: http://relief.org/wp-content/uploads/2013/01/tax-deductions.jpeg
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Tax Season COLUMN: Are your employment expenses an eligible tax deduction?
Steve Bennett
Senior Tax Professional
H&R Block
Smiths Falls, ON
It’s not all that uncommon to hear stories from co-workers who write off their phone bills, home expenses, or even vet bills. Some of these may be eligible expenses, but many certainly are not. Unfortunately, these incorrect tax deductions can be perpetuated when CRA does not identify them immediately. Since Canada’s tax system is self-reporting, many of these errors can go on for years before the taxpayer is audited by CRA. At that point, the taxpayer will owe the tax difference plus interest, which can add up pretty quickly – and, depending on the severity of the omission, penalties may apply.
To avoid any difficulties down the road, it’s important to understand the conditions under which employees can deduct expenses. The employee must have paid for the expenses, been contractually required to pay the expenses, and been employed in an occupation eligible to make the claim. For instance, a commission employee can claim entertainment expenses whereas a salaried employee cannot.
Before the deduction can be made on the tax return, the employer must complete form T2200, Declaration of Conditions of Employment. By completing this form, the employer certifies that the employee is contractually required to pay for certain expenses. When completing the tax return, Form T777, Statement of Employment Expenses, must be completed. This form contains a breakdown of each expense category and calculates the total eligible expenses. The total is then carried to Line 229 as a deduction.
Since employment expense deductions can provide significant refunds, they are regularly audited by CRA. One of the key defences against a CRA audit is documentation. It’s a given that receipts are needed to support a claim, but record keeping becomes a little more complicated in the case of automobile expenses. With automobiles, there is usually some personal use, so a logbook, detailing all travel related to employment, must be maintained – this is a key piece of documentation that many employees do not retain. Using the logbook, the ratio of employment vs. total use is determined and that ratio is used to calculate the amount of vehicle expenses eligible to be claimed. If 55% of all kilometers driven were related to employment, then 55% of all gas, maintenance, insurance, etc. would be an eligible employment expense.
For most Canadians, employment expenses are not an eligible deduction – simply because we do not incur any of the expenses that are specifically allowed. For the common expenses encountered by most employees, the government provides the Canada employment amount which is a credit equal to the lesser of total employment income and $1,127. That usually works out to a refund increase of $169.05, which often seems like a small consolation prize, but every little bit helps!
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by Steve Bennett or H&R Block Canada, Inc.
Image source: http://relief.org/wp-content/uploads/2013/01/tax-deductions.jpeg
