Prior to 2020, my tax returns were, admittedly, pretty boring. As a full-time salaried employee of a bank, my net income for tax purposes consisted of employment income on a T4 slip, some investment income, and an RRSP deduction — and that’s about it.
That all changed in March 2020 as a result of the global pandemic, which has me working from home. This opened up a new opportunity for me to claim, for the first time in my career, a deduction for employment expenses, specifically, work-from-home expenses.
I’m not alone, as it’s estimated that millions of Canadians claimed some home office expenses on their 2020 tax returns. But, even before the pandemic, over 786,000 employees claimed a total of $3.64 billion in employment expenses on their 2017 tax returns (the most recent year data is available).
But as we will see in a recent tax case, not all such claims are ultimately successful. Before we delve into the specifics of this latest case, let’s review the basic rules governing the deductibility of employment expenses.
The general rule
Under the Income Tax Act, an employee who is required to pay for employment expenses for which they are not reimbursed by their employer, including expenses for a home office, may be able to claim a deduction on their return for such expenses. For a valid claim, the employee must generally obtain from their employer a properly completed and signed Canada Revenue Agency Form T2200, “Declaration of Conditions of Employment.”
To be entitled to deduct home office expenses, an employee must be “required by the contract of employment” to maintain such an office, as certified by the employer on the T2200. (For the 2020 tax year, the CRA said it would be sufficient if there is a verbal or written agreement that the employee was working from home due to the pandemic). It must also be either where she “principally” (more than 50 per cent of the time) performs her duties of employment or the space must be used exclusively to meet customers on a regular and continuous basis in the course of employment.
The lower court
The recent case, decided last week, was an appeal by a taxpayer of an unfavourable decision of the lower court — the Tax Court of Canada — back in August 2019. The taxpayer was reassessed for the 2013 tax year concerning his employment expenses.
When the taxpayer filed his 2013 tax return, he claimed a deduction for employment expenses in the amount of $27,406, which included entertainment expenses, travel costs, supplies and work-space-in-the-home expenses (among other expenses). The CRA reassessed him, allowing only $2,999 as deductible employment expenses.
Prior to early 2013, the taxpayer was a salaried employee of an artificial intelligence and optimization company, earning $200,000 annually, with a 25 per cent bonus. While he was an employee, the taxpayer was entitled to reimbursement for all reasonable expenses incurred in the course of his duties; however, his rent and home office expenses, expenses associated with travelling between the company’s offices, and expenses for entertaining potential clients, were not eligible for reimbursement.
In 2012, the company he worked for was sold. In the months that followed, the acquirer merged with another company and the taxpayer’s position was terminated on Jan. 7, 2013. His termination letter stipulated that the taxpayer was entitled to 12 months of base salary in lieu of notice, vacation pay, a pro-rated bonus and $6,500 to cover lodging expenses.
The taxpayer was required to return all company property he had in his possession and signed confidentiality, non-solicitation and non-competition agreements. He was given until Jan. 18, 2013 to submit his statement of any expenses incurred up to Jan. 7, 2013.
The taxpayer attempted to argue that he should be permitted to claim employment expenses throughout 2013 since he had a signed T2200 form from his employer that covered the period from Jan. 1, 2013 through Dec. 1, 2013. But the CRA maintained that the form had “no probative value” because the individual who signed it had not prepared it and did so without verifying the accuracy of the information it contained.
Prior to 2013, the taxpayer claimed very few employment expenses. For example, in 2012 the taxpayer only claimed employment expenses of $1,531 and no deductions for work-space-in-the-home expenses. While the taxpayer maintained that he continued “to perform tasks to finalize certain files and ensure the smooth transfer of other files after signing the termination letter,” he was under no apparent obligation to do so.
In the CRA’s view, the taxpayer’s employment ended on Jan. 7, 2013, and his termination letter did not require him to perform any supplementary duties after his employment ended, aside from returning the property belonging to the company. As the CRA put it, the taxpayer simply “cannot deduct the expenses he claimed because he was under no obligation to incur those expenses as part of his employment.”
The Tax Court judge agreed: “Based on an objective reading of the termination letter, there is no indication of any obligation on the (taxpayer’s) part to perform any duties or incur any expenses in order to receive the compensation provided in the letter…The expenses the (taxpayer) claimed are not deductible because they were not incurred for the purpose of earning employment income and because the (taxpayer) was not bound by contract to pay for those expenses without reimbursement from (his employer).”
The appellate court
The taxpayer appealed the lower court’s decision to the Federal Court of Appeal, which heard the case last week. In its short decision, delivered orally from the bench, the three-judge panel unanimously dismissed the taxpayer’s appeal once again.
It agreed with the Tax Court’s finding that the taxpayer’s employment expenses could not be deductible since the taxpayer “had employment income for a few days during the 2013 taxation year and almost all of … the employment expenses claimed by the (taxpayer) had been incurred after the end of his employment contract.”
The lesson learned from this case should be obvious: Even if you have valid receipts for all your expenses and a signed Form T2200 from your employer to back them up, that’s still insufficient to claim a deduction if you’re unable to demonstrate that you were required to pay those expenses for the purpose of earning employment income.