Deductions From Employment Income

by Tax Guy - Burlington Accountant on March 10, 2010 Print This Post Print This Post

If you receive a T4 slip and most of your income is from employment, there are few deductions available beyond RRSP’s. If you are using tax software and have employment expenses or have rental or investment income, TurboTax Premier is your best choice.

Businesses are allowed more deductions than employees. This is because businesses incur their expenses to earn income. Few employees are required to incur expenses directly in order to earn employment income and the income tax act places limits on the types of deduction available. However, under certain conditions, some expenses may be deducted from employment income.

Salesperson Expenses

Salespeople who are paid on commission may deduct certain expenses paid to earn commission income, including travel, automobile, and other types of expenses. The expenses claimed must be reasonable but there are no deductions available for capital purchases (equipment or property) with the exception of aircraft and automobiles.

To deduct salesperson expenses you must meet all of the following criteria:

  1. You are required by your employer to pay your own expenses.
  2. You are normally required to work away from your employer’s place of business.
  3. You are paid fully or partially by commission.
  4. You did not receive an expense allowance that was included in your income.
  5. You retain a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.

Other Limits on Salesperson Expenses

Meals may only be deducted if you were away from your home community or metropolitan area for a period of 12 hours or more.

The Canadian income tax act only allows you claim deductions against commission income and as such a non-capital loss is not allowed and any loss incurred cannot be used to reduce other income. However, there is an alternative if commission expenses exceed commission income: Claim only for automobile expenses and travel under separate provisions of the Canadian income tax act which permit non-capital losses to be deducted against other forms of income.

Expenses Permitted as Salesperson Expenses

  • Advertising & promotion
  • Meals & entertainment (50% limit)
  • Lodging
  • Accounting & legal fees. You may claim a reasonable deduction for accounting fees paid to help you complete your tax return. You may also deduct legal fees incurred to collect or establish a right to an amount that would have been included as part of your employment income. You must reduce the amount by any amount awarded or any reimbursement received for your legal expenses.
  • Motor vehicle costs
  • CCA an interest expenses are not limited by commission income and can be deducted against other income.
  • Parking
  • Workspace in home
  • Supplies used directly in your work. This includes office supplies, cellular phone airtime, and long distance (your normal monthly charge for cellular or telephone cannot be deducted).
  • Licences
  • Bonding & liability insurance premiums
  • Medical underwriting fees.
  • Salary for an assistant. You are required to withhold taxes and other deductions from the salary paid.
  • Office rent
  • Training costs
  • Courier and transportation costs
  • Leased computers & office equipment. Equipment purchased cannot be deducted nor can capital cost allowance (CCA) be claimed.

Expenses Excluded as Salesperson Expenses

  • Special clothing required to be worn while working.
  • Certain tools for employed trades people.
  • Except for automobiles, aircraft, or musical instruments, CCA cannot be deducted.

Travel & Meal Expenses

If you are required by your employment contract to travel for business and did not receive a reimbursement from your employer for travel, you can make a claim for travel and meal expenses under this provision of the Canadian income tax act.

If you do receive an allowance that does not cover your travel expenses, you have the option of including the allowance in your income for the year and making a subsequent claim for actual expenses. It is advisable that you contact a financial professional to help you determine the best alternative in your case.

Automobile and Aircraft Expenses

If you are required to work away from your employers place of business, were required to pay your own motor vehicle expenses related to your work, and did not receive a reimbursement or allowance, you may claim these expenses under a separate provision of the Canadian income tax act.

Allowable expenses under this provision of the Canadian income tax act include operating expenses, capital cost allowance (an annual percentage of the vehicle cost with limits), and interest paid on funds borrowed to acquire the automobile.

As with travel and meal expenses, if you do receive an allowance that does not cover your automobile or aircraft expenses, you have the option of including the allowance in your income for the year and making a subsequent claim for actual expenses. It is advisable that you contact a financial professional to help you determine the best alternative in your case.

Home Office Expenses

If you are required by your employer to work from home and cover all of the costs associated with maintaining an office at home, then you may be able to deduct your home office expenses. To claim work at home expenses, the space must be either be:

  • the principal place of employment, or
  • be used exclusively for earning employment income and be used on a regular basis to meet customers or other employees.

The total amount of expenses that you can deduct is limited to your employment income. You should also complete a T2200, Declaration of Conditions of Employment and have it signed by your employer.

The expenses allowed under this provision include the proportional cost of utilities, household sundries (i.e. light bulbs & cleaning supplies), rent if the property is rented, property insurance and property tax. However, mortgage interest and capital cost allowance may not be deducted.

You will need to complete a T777, Statement of Employment Expenses to calculate your employment proportion of your home office expenses.

Other Employment Expenses

The Canadian income tax act allows a number of other expenses to be deducted from employment income:

  • Professional membership dues such as law society, doctors associations, engineers, or accounting associations.
  • Office rent or the salary (including EI and CPP premiums) of a substitute if you were required to pay these costs yourself by your employer.
  • Supplies used directly in your employment but excluding uniforms and books.
  • Union or association dues.
  • Legal expenses paid to collect salary or wages. The fees may be paid to establish a right to salary and wages in addition to collecting the amounts owed.
  • Clergy residence may deduct a portion of their residence (rent and utilities).
  • Contributions to registered pension plans and teachers pension plans.
  • Salary or disability reimbursements.
  • Amounts forfeited under a salary deferral arrangement.
  • Musical instruments and artists supplies are deductible if you are employed as either a musician or artist respectively and required to supply your own instruments and materials.
    • For musicians, maintenance may be claimed as well as capital cost allowance on the instruments themselves.
    • For artists, the amount of the deduction is limited to the lower of $1,000 20% of employment from being an artist.
  • Apprentice mechanics may claim a deduction for eligible tools and is limited to the greater of $1,000 or 5% of employment income from being an apprentice.
  • Goods and Serves Tax (GST). GST and provincial sales tax (PST) can be included in the expenses deducted from employment income. In addition, you may claim a rebate of the GST paid as a rebate unless you were employed by a financial institution.

Uniforms & Footwear

These costs are not deductible from employment income. If your employer supplied or reimbursed you for the costs of a special uniform, the cost will not be a taxable benefit if the clothing and footwear is designed to protect you from workplace hazards.

If you were given an allowance to acquire special uniforms and footwear the allowance is not taxable if:

  • You are required to provide receipts to your employer, or
  • If no receipts are required then all of the following conditions are required:
  • The law requires protective clothing at the worksite,
  • You purchased the clothing, and
  • The amount was reasonable.

What Tax Software Should You use?

If your primary income is from employment and includes taxable benefits, TurboTax Standard is your best choice. However, if you have rental or investment income, you should be using TurboTax Premier Edition.

Looking For Professional Help?

If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 110 comments }

Paul O'Connell January 27, 2012 at 12:04 pm

Hello: I’m owed $1200 for freelance work that I will never be able to collect. Even though this former employer acknowledges the debt, he refuses to pay me. Can I deduct this from my regular income as a business loss?

Jason March 12, 2012 at 8:27 pm

I worked for 10months of the year as a salary and bonus employee, I switched to a straight commission postion november 1st. Can I claim losses against the salary and bonus income or just commissions earned for the year?

Thanks

Kal December 12, 2012 at 3:35 am

Hello,
I used to live in Toronto and moved to ottawa last summer after getting a job there. My family moved with me but after a month my wife and kids moved back to our house in Toronto. We are not separated yet. Can I claim the rent that I am paying in ottawa as an employment expense on 2012 income tax return? My wife doesn’t work and I am maintaining two homes now. Your advice is very much appreciated.

Tax Guy - Burlington Accountant December 12, 2012 at 10:50 am

You can’t claim it as an employment expense. However, you may be able to claim moving expenses for the move to Ottawa.

David February 21, 2013 at 3:30 am

Hi, my employer requires me to have (and pay for personally) a cell phone with voicemail (I have this in writing) so that I can be contactable 24/7.

My contract costs $65 CAD/Month and despite regular use I do not go over the contract allowance.

95%+ of all calls I make are business related, either to my employer or to a client

can I claim any of this on my tax return?

Cher April 14, 2013 at 4:51 pm

Yes but your employer will need to complete the form T2200.

J April 29, 2013 at 12:14 pm

What amount can I claim in clothing from employment income. eg, everyday office wear. not designed to protect from hazard.

Also can I claim for gas used travelling to and from work?

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