The CRA has made it clear that it has undertaken a new project in 2017 to carefully review employment expenses. Many of my colleagues in the accounting profession have confirmed that they have also noticed that CRA has been more frequently asking taxpayers to support their employment expenses.
Where the employee is also an owner, we are finding that CRA is taking a tough line and denying even well-supported expenses.
CRA is basing the denial of these expenses based on the Tax Court of Canada Case, Morton Adler vs. the Queen (2010 DTC 1020), in which the burden is on the employee taxpayer to prove that there would be adverse consequences with respect to their employment if they did not use their car or home office.
In that case, the taxpayer was the spouse of the shareholder, and the court therefore took the position that there was little or no risk of the company suing the taxpayer for breach of contract if she failed to perform her duties with her car and home office. They also concluded that she would likely not suffer negative consequences of a poor performance review, and that these expenses were therefore not a requirement of employment. The expense deductions were denied.
Wherever possible employment expenses should be paid by the employer. For example, car expense could be accommodated by paying the employee a per kilometer amount for each supportable business kilometer driven.
Regardless of how you report the expenses, it will still be important to maintain good records.