Principal Issues: [TaxInterpretations translation] 1. Must a personal service business ("PSB"), in the field of selling property or negotiating contracts, earn commissions in order to be eligible to take deductions under subparagraph 18(1)(p)(iii) of the Income Tax Act (the "Act")?
2. Are the expenses deductible by virtue of subparagraph 18(1)(p)(iii) the same as the expenses allowed by virtue of paragraph 8(1)(f)?
3. Can an incorporated employee deduct home office expenses under subsection 8(13) in the calculation of the employee’s employment income where the employee’s home is the principal place of business of a corporation that carries on a PSB that does not consist of the sale of property or the negotiation of contracts?
4. Can an incorporated employee deduct in the calculation of the employee’s employment income the costs of a motor vehicle under paragraph 8(1)(h.1), in the case where the employee does not receive any allowance from a PSB that does not consist of the sale of property or the negotiation of contracts?
Position: 1. Yes..
2. Yes. In cases where the corporation that carries on a PSB receives commissions, the expenses that can be deducted must come within by paragraph 8(1)(f). General restrictions on the deductibility of expenses under sections 18, 67, 67.1 to 67.6 apply.
3. Question of facts. Possibly, if all of the conditions set out in subparagraph 8(1)(iii) and subsections 8(10) and 8(13) are satisfied.
4. Question of facts. Possibly, if all of the conditions set out in paragraph 8(1)(h.1) and subsection 8(10) are satisfied.
Reasons: 1. The wording of subparagraph 18(1)(a)(iii).
2. Application of subsections 8(1), 8(2), 8(4) and 8(10), specifically paragraph 18(1)(p) and subparagraphs 8(1)(h)( iv) and 8(1)(h.1)(ii).
3. Application of subparagraph 8(1)(iii) and subsections 8(10) and 8(13).
4. Application of paragraph 8(1)(h.1) and subsection 8(10).
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
2011 APFF CONFERENCE
Question 21
Negotiating, sales and home office expenses as part of a PSB
Suppose that a corporation carrying on a [personal services business] PSB is working in the field of the selling of property or negotiating of contracts. Under subparagraph 18(1)(p)(iii), certain allowable expenses are the amount that would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount.
Questions to the CRA
A) Must the corporation carrying on the PSB receive commissions from which the expenses under subparagraph 18(1)(p)(iii) will be deductible or can it deduct its expenses without receiving commissions?
B) Are the allowable expenses the same as those provided in paragraph 8(1)(f) for an employee on commission, including legal and accounting fees, advertising and promotion, eligible motor vehicle expenses (including capital cost allowance), food, beverages and entertainment, lodging, parking fees, supplies, an assistant's salary, office rental and home office expenses?
Assuming that the incorporated employee works primarily from home (in a field other than the sale of property or the negotiation of contracts):
C) Is it possible for the employee to personally deduct, from the employee’s otherwise-determined employment income, expenses in respect of the employee’s home office under subsection 8(13)? The employee’s home is the principal place of business of the corporation that carries on the PSB and we have assumed that the form T2200 will be completed by the employer, i.e., the corporation that carries on the PSB.
D) What happens as to the deductibility of the expenses for the use of the employee’s vehicle under paragraph 8(1)(h.1), where the employee is ordinarily required to travel to complete the employee’s work, form T2200 is duly completed and the employee does not receive any allowance from the corporation carrying on the PSB for the use of its motor vehicle?
CRA Response to Question 21 A)
Subparagraph 18(1)(p)(iii) provides that an outlay or expense, to the extent that it was made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a PSB, is not deductible in computing the income of that corporation other than for any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation if the amount would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount.
By virtue of paragraph 8(1)(f), an individual performing functions related to the selling of property or negotiating of contracts for the taxpayer’s employer may deduct in calculating the individual’s income amounts expended by the taxpayer in the year for the purpose of earning the income from the employment not exceeding the commissions or other similar amounts received by the taxpayer in the year.
We are of the view that a corporation carrying on a PSB is subject to the same limitation as that set out in paragraph 8(1)(f) for an employee performing functions related to the selling of property or the negotiation of contracts.
In other words, if in the course of a taxation year a corporation carrying on a PSB did not receive any commission or other similar compensation in the course of carrying on its business of selling property or negotiating of contracts, it cannot deduct any amount spent by it that is related to the selling of property or the negotiation of contracts during that taxation year.
CRA Response to Question 21 B)
Subparagraph 18(1)(p)(iii) allows a corporation to deduct any amount expended by the corporation in connection with the selling of property or the negotiating of contracts if the amount would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount.
For an incorporated employee, the only deductions allowed in computing income from an office or employment are those set out in section 8, taking into account the general restriction set out in subsection 8(2).
In that regard, Guide T4044, Employment Expenses, provides information on the deduction of employment expenses for commissioned and salaried employees, and more specifically, concerning the deduction of legal and accounting fees, eligible motor vehicle expenses, parking fees, employment expenses and other expenses. a qualifying motor vehicle, parking fees, accommodation and meal expenses outside of the metropolitan area, supplies, salary of an assistant and office rental, home office expenses, advertising and promotional expenses, entertainment expenses and capital cost allowance for a motor vehicle.
If the business of the corporation carrying on a PSB is the selling of property or the negotiation of contracts and the corporation receives commissions or other similar payments, then subparagraph 18(1)(p)(iii) would allow the deduction of an expense related to the selling of property or the negotiation of contracts by the corporation that would have been deductible under paragraph 8(1)(f) and an amount for capital cost allowance for a motor vehicle that would have been deductible under subparagraph 8(1)(j)(ii), having regard to subsections 8(4), 8(10) and 8(13).
Finally, in all cases, a corporation carrying on a PSB is subject to the general restrictions set out in sections 18, 67 and 67.1 to 67.6.
CRA Response to Question 21 C)
Subject to the provision of a certificate of the employer under subsection 8(10), subparagraphs 8(1)(i)(ii) and (iii) allow a taxpayer to deduct, in computing income from an office or employment for a particular taxation year, amounts paid in the year in respect of office rent, or salary to an assistant or substitute, provided that the following requirements are satisfied:
a) the employee was required by the contract of employment to provide and pay for such supplies;
b) the employee has not been reimbursed and is not entitled to be reimbursed in respect of such expenses;
c) such expenses may reasonably be considered to relate to such income from an office or employment; and
d) the supplies, for their part, are consumed directly in the performance of the duties of the office or employment of the employee.
By virtue of subsection 8(13), no amount is deductible in computing an individual’s income for a taxation year from an office or employment, expenses otherwise deductible by virtue of paragraph 8(1)(i) for the part of a self-contained domestic establishment in which the individual resides, except to the extent that certain conditions and limits are satisfied. To deduct such expenses, the work space must be, as applicable,
(a) the place where the individual principally performs the duties of the office or employment, or
(b) used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment;
By virtue of subsection 8(2), expenses that are not eligible under section 8 cannot be deducted in computing income from an office or employment.
Expenses in respect of a work space that cannot be deducted in a taxation year because it would result in or increase a loss from an office or employment, are deemed, under the terms of the paragraph 8(13)(c), to be expenses of a work space for the next taxation year for the same office or employment.
Finally, to be entitled to deduct expenses for home expenses, an employee must have a certificate issued by the employer on the prescribed form (T2200 – Declaration of Conditions of Employment) by virtue of subsection 8(10).
The question of whether an employee is eligible for a home office deduction is a question of fact, which depends on the circumstances of each case.
In the particular situation, as provided for in paragraphs 5 and 6 of Interpretation Bulletin IT-352-R2, Employee’s Expenses, including those concerning a work space at home, it could be that the employee, as owner or renter of the employee’s home, may deduct a reasonable proportion of the expenses paid by the employee for the maintenance of the employee’s home according to the use of the work space, as "supplies", by virtue of subparagraph 8(1)(i)(iii).Those expenses may include the cost for fuel, electricity, light bulbs, cleaning materials and minor repairs. If the work space is part of a home rented by the individual, a reasonable proportion of the rent is otherwise deductible under subparagraph 8(1)(i)(ii). However, the employee would not be able to claim capital cost allowance for the employee’s home, nor any tax, insurance or mortgage interest expense.
CRA Response to Question 21 D)
Under paragraph 31 of Interpretation Bulletin IT-522, Vehicle, Travel and Sales Expenses of Employees, provided the requirement in subsection 8(10) is satisfied, an employee is entitled to deduct under paragraph 8(1)(h) or (h.1) amounts spent in the year for travelling provided the amounts are reasonable in the circumstances and all of the following conditions are met:
(a) the employee is ordinarily required to carry on the duties of the office or employment away from the employer's place of business or in different places;
(b) under the contract of employment, the employee is required to pay travel expenses incurred in the performance of the duties of the office or employment; and
(c) the employee is not in receipt of an allowance for travel expenses that was excluded from income by virtue of subparagraph 6(1)(b).
Consequently, in the particular situation, the incorporated employee could deduct expenses related to the use of the employee’s vehicle in computing the employee’s employment income if all the conditions of paragraph 8(1)(h.1) and subsection 8(10) were satisfied.
Lucie Allaire
(613) 957-2046
2011-041189