If you’re hoping for a shiny, new Apple iPhone 7 this holiday season, you’re not alone. U.S. investment bank Piper Jaffray released the results of a survey done last month by its retail team which found that the iPhone was the number one requested gift this year. But even if you get the coveted phone as a present, you’re still on the hook for the cost of the monthly voice and data plan, which can be pricey. But what if you could write off the monthly fee as an employment expense? Or, even better, what if your employer reimburses you for part (or all) of the cost of the monthly plan?
Cellphone as an employment expense
This past week, the Canada Revenue Agency released a technical interpretation responding to a taxpayer’s inquiry as to whether the costs of a basic cellular service plan is deductible from an employee’s employment income under the Income Tax Act where an employer requires the employee to use the cell phone to perform employment duties.
The CRA’s response was based on the assumption that the employee does not earn commission income (where special, more lenient rules may apply) and the employer does not reimburse the employee for any costs associated with the phone, including the cost of the phone itself.
The general rule is that employees are very limited in the types of expenses they are allowed to deduct for the purpose of earning employment income. One deduction permitted is for “the cost of supplies that were consumed directly in the performance of the duties of … employment and that the … employee was required by the contract of employment to supply and pay for.”
While the word “supplies” and the phrase “consumed directly” are not actually defined in the Tax Act, the CRA uses the ordinary meaning of the terms. The CRA defines “supplies” as materials or things that can be used up and the phrase “consumed directly” to mean that the supplies must be used up and “play an integral and essential part in the performance of the employment duties.” Where this can be demonstrated, the cost of the supplies can be deducted as an employment expenses, if the employee was required to provide and pay for the supplies.
The CRA therefore concluded that both cellular minutes and data would be considered “supplies that were consumed directly” where it is determined that the minutes and data “were used up and played an integral and essential part in the performance of the employment duties.” As a result, the cost of cellular minutes and data used for employment purposes is deductible provided the employee was required to supply and pay for the cellular minutes and data herself.
While the CRA acknowledged that service providers typically provide a detailed breakdown of each cellular minute used, they don’t similarly provide a detailed breakdown of cellular data used. As a result, the CRA is of the view that without a detailed breakdown of the data used, “an employee would not be able to substantiate the amount of cellular data that was used for employment purposes” and thus cannot claim a deduction.
There is an exception, however, where an employee can prove that they used their cellular phone exclusively for employment purposes (i.e., no personal use). If so, then you should be able to deduct the costs of a “basic service plan.”
Finally, the CRA stated that where the employment use can indeed be substantiated, an employee can apportion the cost of a basic service plan “on a reasonable basis.” If, however, only the employment use of cellular minutes can be substantiated, only the portion of the service plan for minutes can be apportioned and deducted and the portion paid for data is not deductible.
Employer-provided cellular phone
Now, let’s say that instead of using your own phone for work, your employer providers you with a cell phone and pays the monthly plan. Does this give rise to a taxable employment benefit?
The CRA’s longstanding administrative view on this is that an employer-provided cell phone does not give rise to a taxable benefit and the business use of the phone, reimbursed by your employer, is not taxable.
If, however, part of the use of the phone is personal, the employer is supposed to include the value of the personal use in your income as a taxable benefit. The value of this benefit is based on the fair market value of the service, less any amounts you reimburse your employer.
That being said, the CRA will typically look the other way and not require a taxable employment benefit to be reported when “(t)he plan’s cost is reasonable, the plan is a basic plan with a fixed cost, and the… employee’s personal use of the service does not result in charges that are more than the basic plan cost.”