CRA denies taxpayer’s headhunter charges, however decide disagrees

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A lot of the dialogue in regards to the tax deductibility of employment bills over the previous three years has centered on what staff who’ve been working from residence because of COVID-19 can write off on their tax returns. However it’s additionally necessary to do not forget that different non-reimbursed employment bills, past these associated to your private home workplace, may additionally be tax deductible.

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To be entitled to deduct employment bills, you’ll must get a duplicate of a correctly accomplished and signed Canada Revenue Agency Form T2200, Declaration of Situations of Employment, on which your employer has licensed you had been required to pay varied forms of bills for which you’ll not be reimbursed.

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You’ll additionally want to finish and file a duplicate of Form T777, Assertion of Employment Bills, together with your tax return. This manner lists examples of doubtless deductible employment bills, which might embody: accounting, authorized, promoting and promotion charges; allowable motorcar bills; sure meals, beverage and leisure bills; out-of-town lodging bills; parking; and postage, stationery and different workplace provides. However this listing isn’t exhaustive, and, sometimes, the CRA might problem your declare if a specific expense is uncommon, giant or not on its listing of conventional employment bills.

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That’s precisely what occurred in a latest tax case involving a Quebec wealth-management adviser who was employed at a significant bank-owned brokerage agency from 1997 till her retirement in 2019. The taxpayer throughout her testimony described the character of her work, which included assessing shoppers’ wants, investing their cash and property planning. Though the taxpayer resided in a small city about an hour’s drive outdoors Montreal, she had shoppers all through Quebec, in addition to in Ontario and Nova Scotia. In consequence, she incurred journey bills that weren’t paid for by her employer, and which the CRA absolutely allowed.

In 2015 and 2016, the adviser reported fee revenue on her tax returns of $538,388 and $527,077, respectively, and deducted employment bills of $31,051 in 2015, and $39,435 in 2016.

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The CRA allowed nearly all of her employment bills, together with promotional, motorcar and journey bills, but it surely denied prices she paid to a headhunter to assist discover an acceptable affiliate adviser to hitch her follow. Particularly, the CRA denied $11,112 in 2015 and $10,606 in 2016.

By the use of background to justify the headhunting charges, the adviser defined her efficiency analysis was based mostly on a number of issues, a very powerful of which is the quantity of commissions she earned, which was based totally on bringing in “web new property.” She said her web new property throughout 2014 and 2015 had been “clearly inadequate.”

At the moment, she concluded that if she needed to realize the efficiency anticipated by her agency, she wanted to rent an affiliate adviser who may share her duties and canvass for brand spanking new shoppers. This was confirmed by her brokerage department supervisor, who testified that when an adviser’s clientele turns into bigger, it may be troublesome to make sure the standard of companies, and that in these instances the agency suggests senior advisers rent associates.

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To this finish, the brokerage agency posted the affiliate adviser place internally, however the posting produced few candidates, so the taxpayer was requested to go looking on her personal. It was at this juncture that she determined to rent a search agency to discover a appropriate affiliate to hitch her crew. That new affiliate adviser joined in October 2017. Paperwork produced in court docket confirmed that the hiring allowed the adviser’s commissions to develop by growing web new property to the agency.

The CRA denied the adviser’s value to rent the search agency, arguing the taxpayer wasn’t explicitly required underneath her employment contract to pay the headhunter expense. The CRA mentioned the taxpayer ought to have gone via the interior recruitment course of and chosen somebody from that listing somewhat than utilizing her personal headhunter.

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The decide discovered this to be nonsensical: “This appears illogical to me since (the brokerage supervisor) confirmed that the interior course of … had not been productive.”

The decide additionally mentioned the CRA was considerably contradictory in its method towards the taxpayer’s employment bills. The CRA clearly acknowledged the taxpayer “needed to incur a lot of the bills,” and allowed all of them aside from the manager search agency charges on the premise that the taxpayer was not required to incur “this” expense. Moreover, the CRA admitted throughout questioning that its argument was primarily that the employer’s requirement to pay “different bills” was not particular sufficient to incorporate headhunter bills.

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The decide disagreed. She turned to Query 1 of Kind T2200, which indicated the adviser was required to pay the bills incurred to carry out the duties associated to her work. “In my opinion, that is adequate to conclude that the (taxpayer) meets the situation set out in (the Earnings Tax Act)” to deduct employment bills, the decide wrote.

Lastly, the CRA tried to argue that the charges paid to the headhunter had been capital in nature and, subsequently, not deductible. It argued this on the premise that it was a one-time expense. Once more, the decide disagreed and concluded the prices incurred find an affiliate adviser had been present bills and never capital bills.

Having met the circumstances within the Tax Act to deduct employment bills, the decide ordered the matter be despatched again to the CRA for reconsideration and reassessments on the premise that the adviser is entitled to deduct the quantities paid in 2015 for 2016 for headhunting charges since they clearly fell inside the bills described as “enterprise improvement,” and thus had been bills which the adviser needed to pay and for which her agency offered no reimbursement.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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