Where you earn income from employment and are required by the terms of your employment to incur certain expenses, you might be able to claim a deduction in respect of these expenses on your tax return. Such expenses might include sales expenses for commission employees, travel expenses, motor vehicle expenses, professional or union dues, office rent (including home office expenses if certain conditions are met), assistant’s salary, and consumable supplies. In general, with the exception of depreciation (capital cost allowance) in respect of an automobile or aircraft, employees are not permitted to claim any deductions in respect of capital expenditures.
Your employer must certify the conditions of your employment on Form T2200 Declaration of Conditions of Employment to verify your eligibility to claim employment expenses. The Canada Revenue Agency does not require you to file the form with your tax return; however, you must retain it in case they wish to see it.
In addition to the restriction on capital expenditures, there are other specific restrictions and limits on the expenses you may deduct. Consult a Chartered Professional Accountant to determine what employment expenses you might be able to claim.
If you are required to use your passenger vehicle for business or employment purposes, you are permitted to deduct reasonable expenses for operation and ownership of the vehicle. Such expenses include fuel, licence fees, insurance, repairs and maintenance, depreciation (called “capital cost allowance” for income tax purposes), finance charges, and lease payments. (There are specific limits placed on the amount of depreciation, finance charges and lease payments you are permitted to deduct. These limits vary from year to year.) The deductible portion of automobile expenses is based on the proportion of your total kilometres driven in the year for business or employment purposes relative to the total kilometres driven in the year.
Driving between your home and your normal place of business or employment is generally considered a personal activity, therefore, the automobile expenses in respect of this portion of your driving is not deductible unless you make a stop for business or employment purposes while travel to or from your home. The travel between your home and your employment is considered a personal activity even if you drive a vehicle with your employer’s logo on it or your employer requires you to have the vehicle to be “on call”.
To support your automobile expense deduction you should maintain a careful record of your business and employment kilometers driven for the year, including the date, destination, the distance driven, and purpose for each business trip. If you are audited by the Canada Revenue Agency (CRA) and you do not have a mileage log, the CRA will almost certainly assert your business or employment mileage is a fraction of what you otherwise claimed. There is now mileage tracking software and apps to make recording your mileage easier.
If you receive a reasonable per-kilometer allowance from your employer for the use of a motor vehicle, that allowance is not included in your income and you are not permitted to deduct your actual motor vehicle expenses. The CRA’s reasonable per-kilometer allowance rates for 2015 are $0.55 per kilometer for the first 5,000 kilometers driven and $0.49 per kilometer driven after that. Where you receive both a reasonable per-kilometer allowance and a flat allowance, the entire amount must be included in your income but you may deduct your actual expenses. On December 24, 2015, the Federal Government announced the reasonable per kilometer allowance rate for 2016 will be reduced to $0.54 per kilometer for the first 5,000 kilometers driven and increased to $0.48 per kilometer driven after that.
Your employer must sign the form T2200 Declaration of Conditions of Employment to certify the conditions of your employment require you to use your passenger vehicle. Administratively, the CRA does not require you to file the T2200 with your tax return; however, you must retain it in case they wish to see it.
If you believe you might be eligible to claim automobile expenses on your personal income tax return, consult a Chartered Professional Accountant to help you calculate your allowable deduction.
Home Office Expenses
The income tax rules related to home office expenses (technically called “work-space-in-the-home expenses”) are similar for self-employed individuals and non-commissioned employees as well as commissioned salespersons, however, there are certain important differences.
For Self-Employed Persons
In order for you to deduce your home office expenses from self-employment income (business income), the your home office must be your principal place of business or it must be used on a continuous basis exclusively by you to earn business income including meeting clients, customers, or patients as part of your normal business activity.
Deductible home office expenses for a self-employed person includes rent, repairs and maintenance, insurance, property taxes, mortgage interest (no the mortgage principal), heat, light, and other expenses. The deductible portion of these costs is a “reasonable amount” which is typically calculated based on the square footage of the home office as a percentage of the total square footage of the home.
You may claim a deduction for depreciation on the building (called “capital cost allowance” for
income tax purposes), but doing so could affect the status of your home as your “principal residence” for purposes of claiming the “principal residence exemption” to offset the capital gain on the property when it is sold.
Your home office expense deduction in a year cannot exceed your net business income for the year before the deduction. Excess home office expenses are carried forward to be claimed as a deducted against business income of the following year.
For Non-Commissioned Employees and Employees who are Commissioned Salespersons
For non-commission employees and employees who are commission salespersons, the home office must be the place where the employee principally (more than 50%) performs his or her duties of employment or the home office is used exclusively by the employee on a regular and continuous basis for meeting customers and other persons in the ordinary course of employment.
Deductible home offices expenses for a non-commission employee includes rent, heat, light, water, and maintenance costs (i.e., light bulbs, cleaning, minor repairs, etc.). You will note that interest, property taxes and “capital cost allowance” are not included in this list. The deductible portion of home office expenses for an employee is the same as for a self-employed person, being a “reasonable amount” typically calculated based on the square footage of the home office as a percentage of the total square footage of the home.
Employees who are commissioned salespersons may claim the same home office costs and in the same proportion as a non-commission employee plus a proportionate amount of insurance and property taxes but they cannot deduct mortgage interest or “capital cost allowance”.
For both the commission and non-commission employees, the home office expenses deducted in the year cannot exceed the income from that particular source of taxable employment income for the year. Unused expenses may be carried forward and deducted against that particular income following year.
Your employer must certify that the conditions of your employment require you to have a home office by signing the form T2200 Declaration of Conditions of Employment.
Administratively, the CRA does not require you to file the T2200 with your tax return; however, you must retain the form in case the CRA wishes to see it.
Tradesperson’s Tools Deduction
Many employed trades people must provide their own tools as a condition of employment. In recognition of this, an employed tradesperson is entitled to deduct the cost of eligible new tools acquired in a taxation year with a cost in excess of $1,146, including GST/HST. The maximum deduction for eligible tools is $500 for the year.
An eligible tool is a tool that is acquired by the taxpayer for use in connection with the taxpayer’s employment as a tradesperson that has not been used for any purpose before it is acquired by the taxpayer. Electronic communication devices and electronic data processing equipment will not qualify as eligible tools (unless the device or equipment can be used only for the purpose of measuring, locating or calculating).
Your employer must certify the conditions of your employment on Form T2200 Declaration of
Conditions of Employment to verify your eligibility to claim the cost of tools. The Canada
Revenue Agency does not require you to file the form with your tax return; however, you must retain it in case they wish to see it.
The tradesperson will also be eligible for a rebate of the goods and services tax/harmonized sales tax paid on the portion of the purchase price of the new tools that is deducted in computing employment income.
Consult one of our knowledgeable Chartered Professional Accountants for more information.
For more really useful tax tips, visit https://www.bccpa.ca/CpaBc/media/CPABC/News_Events_Publications/Publications/TaxTipsandRRSP/Tax-Tips-2015.pdf
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.