Advisor Expenses

Advisor's Edge

2010-09-27

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Once in a while, it’s refreshing to see a financial advisor who takes on the Canada Revenue Agency with regards to business expenses, and ultimately succeeds, at least in getting some of the originally-disallowed expenses permitted.

Take the case decided last month of insurance specialist Gordon LeRiche (LeRiche v The Queen, 2010 TCC 416). In 2003, the tax year under review, Mr. LeRiche was responsible for providing estate-planning advice to CIBC Wood Gundy’s (“Gundy”) clients serviced by its branches in Simcoe, St. Catharines, Hamilton, Burlington, and Mississauga (two branches). He also provided estate-planning support to the investment advisors located at those branches.

Mr. LeRiche and his three assistants worked out of the Gundy offices in Mississauga.

When Mr. LeRiche filed his tax return for 2003, he deducted employment expenses of approximately $108,000. The CRA reassessed Mr. LeRiche in late 2005, reducing the amount of deductible employment expenses to only $34,500. Mr. LeRiche objected, and ended up in Tax Court as a result.

At the hearing, Mr. LeRiche filed over 140 documents supporting the deduction of nearly all of the items he claimed on his tax return.

The Income Tax Act has specific rules governing the types of expenses a commissioned employee is permitted to deduct. In addition, an expense is only deductible if it is “reasonable,” was incurred for the purpose of earning income and was neither a personal nor a capital expense (other than car expenses.)

In conducting CRA’s review of Mr. LeRiche’s expenses, the CRA denied various expenses, either because the expense was not incurred for the purpose of earning income from employment, the expense was a capital expense or it was simply not reasonable in the circumstances.

Some of the expenses under dispute were: advertising and promotion, supplies and staff expenses.

Advertising and Promotion

During the year, Mr. LeRiche deducted about $7,600 in promotional expenses, supported by approximately 100 receipts. These were incurred by Mr. LeRiche to promote himself to other investment advisors, clients, prospects, colleagues, head office staff, insurance company suppliers, and strategic alliances.

The CRA allowed only the $2,000 of promotional expenses incurred in respect of clients, prospects, and strategic alliances and refused any expenses incurred by Mr. LeRiche to promote himself among advisors and staff.

The Judge disagreed and found all the promotional expenses to be tax deductible since the investment advisors frequently referred clients to Mr. LeRiche and “they were an important source of business for (him)…It was important for him to meet with the investment advisors to explain to them the services and products he could provide to their clients.”

Supplies

Mr. Le Riche claimed nearly $13,000 in supplies which the CRA denied since Gundy already provided him with the supplies he needed, yet he “chose to purchase duplicate and supplemental supplies.”

Again, the Judge disagreed, writing that “the Court must not second-guess the business judgment of the taxpayer…(Mr. LeRiche) decided that supplies in addition to those provided by…Gundy were required to effectively carry on his operations. That decision was a business decision.”

The Judge therefore concluded that most of the expenses were allowable other than $4,500 relating to computer equipment which were non-deductible capital expenses.

Staff Expenses

Mr. LeRiche claimed $12,200 in staff expenses, relating to expenses he personally reimbursed to his three assistants.

This amount included the costs of assistants’ cell phones, highway tolls and miscellaneous out-of-pocket expenses including car allowances.

The allowances were based upon an estimate of kilometres driven by each staff member while carrying out her duties. The CRA argued that the amounts paid were “not reasonable since (his assistants) did not maintain mileage logs.”

The Judge didn’t find this lack of a logbook fatal to Mr. LeRiche’s ability to deduct the mileage allowances paid, writing, “I fail to see why (his) deduction should be denied merely because his employees did not maintain mileage logs. Deductibility is dependent upon the purpose test…and a determination of whether the amounts paid as allowances were reasonable.”

After all was said and done, the Court found that Mr. LeRiche was entitled to deduct a total of $78,000 of expenses.

While Mr. LeRiche spent over $70,000 in legal and accounting fees fighting this battle, he regarded the expenses “as an investment, not as a cost. The issues if not challenged, could have been used for reassessment of future years’ tax returns, producing a much larger problem,” says LeRiche.

Mr. LeRiche tried to avoid a costly trial from the outset but was “forced into this.” At each point of the objection process, LeRiche explained, no matter what he submitted to the CRA, they simply disagreed and “dug in their heels.”

He therefore felt his only recourse was to go to Court.

While Mr. LeRiche didn’t get the full amount he was claiming, it was nearly $45,000 higher than CRA’s original assessment, proving that with good records and proper receipts you can beat the tax man – or at least meet him halfway.

Postscript – The Judge awarded Mr. LeRiche costs, which are paid according to a very modest tariff schedule although Mr. LeRiche intends to make a further representation to the Court to be awarded more than simply the tariff amounts. Any legal fees not recovered, however, are fortunately tax deductible.