Yesterday's budget proposed a new credit to help employees who often incur
various employment expenses for which they get no tax relief.
Under the pre-budget tax rules, there is a huge inequity between employees
and the self-employed when it comes to writing off legitimate expenses. Those
rules treat the self-employed or "independent contractor" much more favourably
from a tax point of view, since a self-employed business person can take
advantage of myriad tax deductions that are severely restricted for employees.
This issue came to the forefront in a 2004 Supreme Court of Canada decision
that dealt with a broker who was unable to deduct the cost of buying another
broker's client list. Thomas Gifford was denied any deduction for the $100,000
he paid to purchase the client list. The Supreme Court publicly highlighted this
unfairness, saying "that employees are treated differently than taxpayers
earning income from business... is not novel nor readily seen as fair.... This
seemingly inequitable result for [Gifford] is the result of the structure of the
[Income Tax] Act."
For example, consider the employee who purchases a home computer, used
exclusively in the evenings and on weekends to check his e-mail, conduct
Internet research and prepare reports. Because of his employee status, he would
not be entitled to any deduction in respect of the capital cost of the computer
since, under the current rules, employees are only allowed to depreciate
automobiles or airplanes. Certainly, one would think that many more employees
today use personal computers in the performance of their employment duties than
use airplanes.
In recognition of this, yesterday's budget announced that beginning July 1,
2006, there will be a new tax credit exclusively for employees, called the
"Canada Employment Credit." According to Finance Minster Jim Flaherty, "This new
tax credit gives Canadians a break on what it costs to work, recognizing
expenses for things such as home computers, uniforms and supplies."
The good news is that no receipts need be kept to justify any
employment-related expenditures. In fact, no expenditures need actually be made
at all. Instead, the new credit will provide tax relief on the lesser of $500
and an individual's employment income for the year.
For 2006, since this new credit only takes effect mid-year, the maximum
amount on which the credit is calculated will be $250. For the 2007 and
subsequent taxation years, however, the maximum amount on which the credit is
calculated will be increased to $1,000.
Since it's a tax credit, the actual tax savings are calculated with reference
to the lowest personal income tax rate for the taxation year (i.e. 15.25% for
2006 and 15.5% for the 2007 and subsequent taxation years). The $1,000 amount on
which the Canada Employment credit is based will be fully indexed to inflation
after 2007.
It is likely that most provinces will also follow suit, matching this credit
with their own provincial credits and thus increasing the tax benefits to
employees.
- Jamie Golombek is the Vice-President, Taxation & Estate Planning, at AIM
Trimark Investments in Toronto.