Principal Issues: What expenses are deductibles in respect of a work space in home and an automobile (both for an employee and for a self-employed individual) if the individual owns the property, alone or with someone else or if he/she does not own the property?
Position: No new position. Explanation of certain provisions of the Act.
Reasons: General questions.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 16
Home office and automobile expenses
An individual may, in computing the individual’s income from employment or a business, deduct expenses in respect of the individual’s home office and/or automobile. Different expenses are eligible for the computation of the individual's income in respect of the home office or automobile, depending on whether or not the employee is an employee or self-employed. In addition to the various expenses related to the utilization of the property, it is possible, in certain cases, to also deduct capital cost allowance.
It may happen, however, that the individual does not own 100% of the self-contained domestic establishment where the individual’s home office is located or of the automobile used in the course of the individual’s work.
In some cases, it may be that an individual, resident in Québec, may co-own the property in question with another person (for example, his or her spouse) or even that the other person may be the sole owner of the property used by the individual. For the purpose of the moving expense deduction, the CRA has already recognized in some Technical Interpretations that expenses related to a residence owned by a spouse may nevertheless qualify (see Technical Interpretations 5-923389, 2009-0313341E5 and 2013 -0476171E5).
Finally, it may happen that an individual takes on all expenses related to a self-contained domestic establishment and an automobile, or also share such expenses with another person.
Questions to the CRA
a) Can the CRA clarify its position with respect to various deductible expenses with regard to a home office and automobile (both of an employee and independent contractor) where the individual is co-owner of the property with another person? Would CRA’s position be the same whether or not the other person was the spouse of the taxpayer?
b) Can the CRA clarify its position with respect to various deductible expenses with regard to a home office and automobile (both of an employee and independent contractor) where someone other than the individual is the sole owner of the property? Would CRA’s position be the same whether or not the other person was the spouse of the taxpayer?
c) Can the CRA clarify its position with respect to various deductible expenses with regard to a home office and automobile (both of an employee and independent contractor) where the individual is the sole owner of the property, but certain expenses related to the use of the property are paid by another person? Would CRA’s position be the same whether or not the other person was the spouse of the taxpayer?
CRA Response
The CRA is being asked to clarify its position regarding the deductibility of certain business or employment expenses. You will find below some clarifications in the form of general comments.
1) Assumptions
These comments are based on the following assumptions:
- the private law applicable in the particular situations is that of Québec, namely the provisions of the Civil Code of Québec;
- the automobile is an "automobile", a "passenger vehicle" and a "motor vehicle" within the meaning of those words in subsection 248(1);
- the individual does not perform functions related to the sale of property or the negotiation of contracts for the employer;
- the expenses are reasonable in the circumstances. (footnote 1).
2) Self-employed person
2.1) General rules
Subsection 9(1) provides that, subject to the other provisions of Part I, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
The Supreme Court of Canada considered the concept of profit in Canderel Ltd. v. Canada (footnote 2), and set out six principles relevant to the computation of income for the purposes of the Income Tax Act that must be applied in each particular case to determine, inter alia, whether that income accurately reflects the taxpayer's profit for the year in question. One of these principles is that a taxpayer is free to adopt any method which is not inconsistent with the provisions of the Income Tax Act, established case law principles or "rules of law" and well-accepted business principles. Furthermore, on reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture.
In general, a taxpayer may deduct reasonable expenses of a current nature incurred by the taxpayer to earn income from a business where the deduction is not otherwise restricted, including by the application of paragraphs 18(1)(a), 18(1)(b), 18(1)(h), subsection 18(12) and section 67.
Paragraph 18(1)(a) provides that in computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. The application of subsection 18(1)(a) remains a question of fact that can only be resolved after considering all the facts and circumstances in a particular situation.
2.2) Concept of "expense incurred"
The courts (footnote 3) have indicated that according to the jurisprudence of the Federal Court of Appeal, an expense is only "incurred" within the meaning of paragraph 18(1)(a) where there is an obligation to pay a sum of money. Since expenses cannot be considered to be incurred by an individual who is not thereby obligated to pay a sum of money, the CRA is of the view that expenses paid are not necessarily expenses incurred by a taxpayer.
The question of whether an expense has been incurred by a taxpayer is a mixed question of law and fact that must be resolved according to its particulars. All written or verbal agreements between the parties and the applicable private law must be taken into account.
For an expense to be considered to have been incurred for the purposes of paragraph 18(1)(a), it is not necessary that the expense be paid by the person incurring the expense. Consequently, the CRA is of the view that the mere fact that a taxpayer does not himself or herself pay an expense incurred by the taxpayer and that is instead paid by a third party is irrelevant in itself in determining whether paragraph 18(1)(a) prevents the deduction of the expense by the person who incurred it.
2.3) Current expenses for a home office
Depending on the circumstances, current expenses for a home office may be deducted in computing the income of a business.
For the purposes of section 9, title to a property is not a determining factor by itself in determining whether current expenses for a home office incurred for the purpose of earning income from a business are deductible in computing the income of the business or property.
Furthermore, notwithstanding any other provision of the Income Tax Act, subsection 18(12) provides for restrictions on the expenses that may be deducted in respect of a self-contained domestic establishment in which the individual resides.
Paragraph 18(12)(a) provides that no amount shall be deducted in respect of an otherwise deductible amount for any part of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either
(i) the individual’s principal place of business, or
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.
Paragraph 18(12)(b) provides that if part of a self-contained domestic establishment in which the individual resides is either the individual’s principal place of business, or used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business, the amount for the work space that is deductible in computing the individual’s income for the year from the business cannot exceed the individual’s income for the year from the business, computed without reference to that amount and sections 34.1 and 34.2.
Paragraph 18(12)(c) provides that any amount that is not deductible by reason only of paragraph 18(12)(b) for the immediately preceding taxation year is deductible in computing the individual’s income from the business for the year, subject to paragraphs 18(12)(a) and 18(12)(b).
The ownership of a property does not in itself have an impact on the application of subsection 18(12).
2.4) Current expenses for an automobile
Depending on the circumstances, current expenses for an automobile may be deductible in computing income from a business.
For the purposes of section 9, the ownership of a property is not by itself a determining factor in determining whether current expenses in respect of an automobile that a taxpayer incurs in order to earn income from a business are expenses that are deductible in computing the income of that business.
2.5) Capital cost allowance
In short, paragraph 18(1)(b) does not permit, except as expressly permitted by the Income Tax Act, deduction of capital expenditures in computing the income of a taxpayer.
Capital cost allowance is allowed under paragraph 20(1)(a), and section 1100 of the Income Tax Regulations (ITR). Under ITR section 1100, the deduction is calculated as a percentage of the "undepreciated capital cost" ("UCC") of depreciable property of each of the prescribed classes provided in ITR Schedule II.
UCC is defined in subsection 248(1) and has the meaning assigned by subsection 13(21). This definition is expressed in the form of a formula. To calculate the UCC at any given time, element A of the formula in that definition represents the total of all amounts each of which is the capital cost to the taxpayer of a depreciable property of the class acquired before that time.
The term "depreciable property" is defined in subsection 248(1) and has the meaning assigned by subsection 13(21). In short, depreciable property means property acquired by a taxpayer for which there is an entitlement to a deduction for capital cost allowance under paragraph 20(1)(a) in computing income earned by the taxpayer from a business for that year (or a preceding taxation year.)
The CRA is of the view that a taxpayer cannot claim capital cost allowance for property that the taxpayer does not own under the applicable private law and in which the taxpayer does not have a leasehold interest.
2.5.2) Undivided co- ownership
Where depreciable property is acquired by a taxpayer, depreciation is calculated based on the capital cost of the property to the taxpayer. The term "capital cost" is not defined in the Income Tax Act. Where a property is acquired in co-ownership, the CRA is of the view that the capital cost of the property to the taxpayer is the capital cost of its undivided interest in the property.
The term "cost" is not defined in the Income Tax Act. Where a property is acquired in co-ownership, the CRA is of the view that the cost of the property for the taxpayer is the cost of the taxpayer’s undivided share in the property.
2.5.3) Application of paragraph 13(7)(g) to a passenger vehicle
A passenger vehicle may be included in class 10 or class 10.1. A passenger vehicle whose cost to the taxpayer exceeds $30,000 (footnote 4) is included in class 10.1. Other passenger vehicles fall within class 10.
If the cost of a passenger vehicle for a taxpayer exceeds $30,000, paragraph 13(7)(g) sets the capital cost of this passenger vehicle at $30,000 (footnote 5).
In addition, section 67.4 provides an additional rule in respect of a motor vehicle owned by more than one person. Under that section, where a person owns a motor vehicle jointly with one or more other persons, the reference in paragraph 13(7)(g) to the amount of $30,000 (footnote 6) is replaced by the product of the multiplication of that amount, by the ratio between the FMV of the person's interest in the vehicle and the FMV of the interests in the vehicle of all those persons.
For example, if a taxpayer has a $60,000 interest in a passenger vehicle worth $80,000, under section 67.4, the amount of $30,000 (footnote 7) in paragraph 13(7)(g) which would be applicable to that taxpayer is $22,500 (footnote 8).
2.6) Expense allocation
Any expenses related to a good or service that was used in part for the purpose of earning income from a business and in part for personal use must be allocated between the portion for personal use and the portion used to earn income from the business.
2.7) Other tax impacts of an expense paid by a third party
Where business expenses have been paid by someone other than the taxpayer carrying on the business, the amounts so paid could, depending on the circumstances, be included in the income of the taxpayer's business or give rise to the application of section 80.
The question of whether those amounts should be included in the income from the taxpayer's business is one of facts that can only be resolved after an analysis of all relevant facts specific to each situation.
The jurisprudence (footnote 9) has established principles for determining whether an amount qualifies as income for the purposes of the Income Tax Act for a taxation year. The principles developed by the jurisprudence will help a taxpayer to determine whether the amounts paid by another person must be included in the taxpayer’s income under section 9.
3) Employee (an individual who does not perform functions related to the sale of property or the negotiation of contracts for the individual's employer)
3.1) Restriction in computing income from an office or employment
Subsection 8(2) sets out a general restriction on the deduction of amounts in computing income from an office or employment. Under that provision, only the amounts provided for in section 8 are deductible in computing a taxpayer's income for a taxation year from an office or employment.
Furthermore, subsection 8(10) provides that a taxpayer may not deduct an amount for a taxation year under inter alia paragraph 8(1)(h.1), or subparagraph 8(1)(i)(ii) or 8(1)(i)(iii), unless the taxpayer attaches to the taxpayer’s income tax return for the year a prescribed form, signed by the taxpayer’s employer, certifying that the conditions set out in the applicable provision of the Income Tax Act were met in the year with respect of the taxpayer.
3.2) Home office
Certain employment-related expenses may be deducted under paragraph 8(1)(i). For an employment-related expense to be deductible in computing a taxpayer's income for a taxation year from an office or employment, the preamble to paragraph 8(1)(i) specifies that the amounts must be paid by the taxpayer in the year, or on behalf of the taxpayer in the year if the amount paid on behalf of the taxpayer is required to be included in the taxpayer’s income for the year in respect of the amounts listed in subparagraphs 8(1)(i)(i) to 8(1)(i)(vii).
Subject to the conditions set out in the preamble to paragraph 8(1)(i), subparagraph 8(1)(i)(ii) allows a taxpayer to deduct in computing the taxpayer’s employment income office rent the taxpayer was required to pay for by the contract of employment,
Subject to the conditions set out in the preamble to paragraph 8(1)(i), subparagraph 8(1)(i)(iii) allows a taxpayer to deduct in the computation of the taxpayer’s employment income the cost of supplies that were consumed directly in the performance of the duties of the office or employment and that the taxpayer was required by the contract of employment to supply and pay for.
Home office expenses may include expenses such as electricity, heating, maintenance, property taxes, and home insurance costs associated with maintaining the office. However, they cannot include mortgage interest or capital cost allowance for a building.
Furthermore, subsection 8(13) provides, inter alia, that notwithstanding paragraph 8(1)(i), no amount is deductible in computing an individual’s income for a taxation year from an office or employment in respect of any part of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either:
(i) the place where the individual principally performs the duties of the office or employment, or
(ii) 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;
The ownership of a property does not in itself have an impact on the application of subsection 8(13).
3.3) Costs relating to a motor vehicle
In short, subject to certain exceptions, paragraph 8(1)(h.1) allows a taxpayer to claim a deduction in computing income for amounts expended in the year on motor vehicle expenses where among other requirements the taxpayer was required under the terms of the contract of employment, to pay the motor vehicle expenses that the taxpayer incurred to travel in the performance of the duties of the office or employment.
The question in particular as to whether a taxpayer was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment is a mixed question of law and fact that must be resolved in the light of all the relevant facts. All written or verbal agreements between the parties and the applicable private law must be taken into account.
Furthermore, the wording of paragraph 8(1)(h.1) adds that the amounts must, in particular, have been "expended" by the taxpayer in order to be deducted in computing the taxpayer’s income under that paragraph. The term "expended" is not defined in the Income Tax Act. For the purpose of subsection 8(1), the CRA considers that the term "expended" is used in the sense of "paid".
Thus, if all the other requirements in paragraph 8(1)(h.1) are satisfied, the amounts paid during the year for motor vehicle expenses cannot be deducted in computing the taxpayer’s income under paragraph 8(1)(h.1) if they are not paid by that taxpayer.
The ownership of a property does not in itself have an impact on the application of paragraph 8(1)(h.1).
3.4) Capital cost allowance
3.4.1) Motor vehicle
Subject to certain conditions, in computing the income from an office or employment, a deduction for capital cost allowance for a motor vehicle is allowed under paragraph 8(1)(j) and ITR section 1100.
For a discussion of the capital cost allowance for a motor vehicle for purposes of determining the income of an office or employment, please refer to section 2.5 above, with any necessary adaptations.
For this purpose, the terms "UCC" and "depreciable property" are defined in subsection 248(1) and apply to the entire Income Tax Act.
3.4.2) Home office
The CRA is of the view that a taxpayer cannot deduct in computing income from an office or employment an amount as a depreciation expense for a building because there is no provision in section 8 which allows such a deduction.
3.5) Expense allocation
Any expenses related to a good or service that was used in part for the purpose of earning income from a business and in part for personal use must be allocated between the portion for personal use and the portion used to earn income from the business.
3.6) Application of paragraph 6(1)(a) to an expense paid by a third party
Where amounts are paid by someone other than the taxpayer, paragraph 6(1)(a) could, depending on the circumstances, apply to the benefit arising from such payment.
Paragraph 6(1)(a) is not limited to benefits received from the taxpayer's employer. In general, and subject to the exceptions in paragraph 6(1)(a), the taxpayer must add to the taxpayer’s income the value of the benefits received in the year in the course of, or by virtue of the taxpayer’s office or employment.
Whether the value of the benefits received by the taxpayer in the year is in respect of, in the course of, or by virtue of an office or employment is a question of fact upon which the CRA cannot make a determination without having analyzed all the facts relevant to a particular situation.
Anne Dagenais
5 October 2018
(613) 670-9050
2018-076887
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 This assumption makes reference to section 67.
2 [1998] 1 S.C.R. 147.
3 Fédération des Caisses populaires Desjardins de Montréal et de l’ouest du Québec v. The Queen, 2001 F.C.A. 27.
4 That amount of $30,000 was determined pursuant to subsection 13(2) ITA and paragraph 7307(1)(b) ITR.
5 Id.
6 Id.
7 Id.
8 $60,000 divided by $80,000, and multiplied by $30,000.
9 Ikea Limited v. The Queen, [1998] 1 S.C.R. 196 and Canderel Ltd. v. The Queen, [1998] 1 S.C.R. 147