Employees are allowed fairly limited deductions in computing their employment income for tax purposes. For example, they can normally deduct union dues, professional fees, the cost of supplies, and home office expenses for items like rent, supplies, heat, utilities and maintenance. Certain conditions must be met. We provided information about deductible home office expenses in our June 2020 Letter. (As discussed in the next section of this Letter, the CRA will allow a simplified “flat rate” method for employees working at home during the COVID-19 pandemic.)
Additionally, and again subject to certain conditions, employees can deduct non-car travel expenses, such as airfare, train, taxicab, hotel and 50% of out-of-town meal costs incurred in the course of their employment duties. They can also deduct car expenses incurred in the course of employment like gas, maintenance, insurance, and car leasing costs. The deductions are not allowed if the employee is reimbursed by the employer, or if the employee receives a tax-free travel or car allowance, as the case may be.
Employees who are paid partly or wholly by commission based on sales or negotiation of contracts (“commissioned employees”), and who are ordinarily required to work away from their employer’s place of business, can deduct certain additional expenses that are not allowed for other employees. These additional expenses include:
- Promotional and advertising expenses
- Leasing costs (say, from leasing a computer)
- Meal and entertainment expenses for clients or customers (but normally only 50% of these expenses are deductible)
- If they have a home office, a pro-rata portion of their property taxes and home insurance premiums
Commissioned employees can deduct the travel and car expenses listed earlier. If the travel and car expenses are less than their commission income for the year, they can deduct the additional expenses, but only to the extent that the total travel, car and additional expenses do not exceed the commission income.
You are a commissioned employee and your commissions for the year are $40,000. Your salary is $80,000.
You incur $10,000 of the additional expenses listed above.
Scenario 1: You incur travel and car expenses of $45,000. In this scenario, you can deduct the $45,000, but not the additional $10,000 of expenses because the travel and car expenses already exceed your commissions.
Scenario 2: You incur travel and car expenses of $35,000. In this scenario, you can also deduct $5,000 of the additional expenses, for a total of $40,000, since the total deduction is limited to your commission income.
Note that the above rule does not apply to car costs that are interest expense on a car loan or capital cost allowance (tax depreciation) on the car. These expenses are claimed separately from the above rule, but are subject to certain monetary limits. The monetary limits are noted later in this Letter.
In all cases, the employee is required to have Form T2200 signed by their employer, certifying that they meet the conditions for the deduction.