This past week, the Institute of Corporate Directors asked the federal
government to change the Income Tax Act to allow corporate directors to deduct
their non-reimbursed expenses incurred to carry out their fiduciary duties. For
example, a director who attends a two-day seminar on corporate governance and is
not reimbursed by the company of which he or she is a director is currently
unable to deduct the cost of attending the seminar.
While this request is certainly worthy of the government's attention, the
Department of Finance should go further than amending the law for the benefit of
corporate directors. The directors' dilemma stems from the fact that under the
Act, directors are considered to be employees. As a result, they are limited in
what employment expenses they can deduct.
The current rules concerning employment expenses for all employees are
unsatisfactory, treating 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 which are severely restricted for
employees.
Earlier this year, the Supreme Court of Canada acknowledged this particular
disparity in the Gifford decision, a case 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."
Consider, for example, an employee who buys a home computer, used exclusively
in the evenings and on weekends to check e-mail, conduct Internet research and
write reports for work. Because of her employee status, she is not entitled to
any deduction in respect of the capital cost of the computer since, under the
outdated Tax Act, employees are only allowed to depreciate automobiles or
airplanes. Certainly, many more employees today use personal computers in the
performance of their employment duties than use airplanes (crop dusters
excepted).
Employees weren't always treated this harshly when it comes to employment
expenses. Prior to the 1987 Tax Reform, employees were entitled to claim a $500
basic employment expense deduction, meant to compensate employees for their
non-deductible employment expenses. In 1998, a similar deduction was reinstated,
now worth $1,000, but is limited only to certain emergency service volunteers
such as rescuers, ambulance technicians, and firefighters and therefore does not
benefit the average employee.
The government should heed the call of the ICD to modernize the Act so as to
allow greater deductibility of employment expenses, not just for directors, but
for all employees. After all, it takes money to earn money -- money that is
ultimately taxed, such that the costs to earn it should be properly tax
deductible.