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Staff are extraordinarily restricted within the kinds of bills they’ll deduct for tax functions and the principles are notably tough in the event you’re deducting a wage or different charges paid to an assistant.

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As a latest case demonstrates, the Canada Income Company could resolve to take a nearer take a look at your employment expense deduction when the “assistant” you occur to rent is your partner, accomplice or different member of the family.

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Wage paid by an worker to a member of the family is usually completed to break up revenue, particularly if the worker is in a comparatively excessive tax bracket and desires to redirect a few of their revenue to a zero- or low-income partner or member of the family.

However when found, the CRA typically challenges such planning, and asks the worker to show the quantities paid to their relative have been “cheap” given the hours (allegedly) labored by that relative, and that the quantities have been really paid to that particular person.

Each points have been on the centre of the latest case involving a Higher Toronto Space automobile dealership supervisor who claimed employment bills of $55,945 in 2015 and $50,793 in 2016 in opposition to roughly $110,000 of annual employment earnings.

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These bills consisted of $24,000 in assistant’s wage paid to a member of the family for every of 2015 and 2016, and motorized vehicle bills (leasing, parking, gasoline and insurance coverage) of $29,000 in 2015 and almost $27,000 in 2016. He additionally wrote off “workplace provides” consisting of an Apple Watch and an Apple laptop computer, totalling $2,850.

The CRA denied all of the taxpayer’s employment bills and the matter ended up in Tax Court docket.

The taxpayer defined he employed his mother-in-law in 2015 to do some work utilizing a house laptop computer pc with a VPN connection to his workplace recordsdata. The work concerned finishing and shutting the file on every car sale, lease or financing association as they occurred, and included coming into confidential info of each the shoppers and the dealership.

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He testified that given his quite a few obligations on the dealership, he didn’t have the time to do that himself and wanted to rent somebody, akin to his mother-in-law, “whom he may totally belief with this delicate info” to do that work previous to submission to the dealership’s accountant for posting.

The taxpayer claimed a deduction of $24,000 in opposition to his 2015 employment revenue for wage paid to his mother-in-law for this work. Because it occurs, his mother-in-law lived with him in the identical home, alongside together with his spouse and youngsters, and, as such, he testified he didn’t really pay his mother-in-law the $2,000 monthly, however fairly “credited the quantity in opposition to month-to-month hire for her residing in his home, and in opposition to meals costs and transportation costs to her and unspecified bank card or different costs.”

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Sadly, no documentation corroborating this crediting was entered in proof, the quantity of the “purported” month-to-month hire was not said and his mother-in-law didn’t testify. There have been additionally no data as to the hours the mother-in-law labored.

Throughout cross-examination, it was instructed the taxpayer’s mother-in-law’s information of English was poor, to which he responded that she had had some ESL coaching and that the work he had her do didn’t contain understanding English so long as she was “in a position so as to add and subtract.”

In 2016, the taxpayer deducted one other $24,000, besides the assistant he employed this time was his spouse. He testified that his spouse was paid by the use of month-to-month quantities of $2,000 being deposited right into a joint account held by each spouses. In different phrases, there was no precise switch of funds to his spouse. No data of funds or hours labored have been saved, and his spouse didn’t testify in courtroom.

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Beneath the Earnings Tax Act, to be able to declare a deduction for wage paid to an assistant, an worker have to be required to take action by the worker’s employment contract, and a accomplished CRA Kind T2200, Declaration of Situations of Employment, signed by the employer, have to be obtained.

The taxpayer was unable to supply any proof that his employment contract required him to pay a wage to an assistant, nor may he produce a signed T2200 type for both the 2015 or 2016 tax 12 months. As well as, no documentary proof was submitted supporting precise funds of the alleged $24,000 wage for both 12 months.

For the 2015 tax 12 months, the decide concluded there was no proof the taxpayer usually charged his mother-in-law for hire, meals and transportation, so he discovered the $24,000 paid to her as an assistant was non-deductible.

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As for the hiring of the taxpayer’s spouse within the 2016 tax 12 months, the decide famous, based mostly on a previous case, that merely having an worker’s wage deposited right into a joint account held by two spouses doesn’t represent cost from partner A of a wage to partner B “qua assistant.”

The decide additionally questioned the reasonableness of the funds in each years. How was the annual quantity of $24,000 decided? It was clearly not based mostly on the variety of hours labored. When requested, the taxpayer merely responded that $24,000 was “what we predetermined.”

The decide felt that $24,000 yearly for an assistant was an “arbitrary quantity and overly beneficiant for part-time hours of pc laptop computer work … (and) was not cheap … for both 12 months.”

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The decide additionally challenged the legitimacy of the taxpayer’s bills for 2 motor automobiles, a BMW and a Toyota. In courtroom, the taxpayer admitted the Toyota-related car costs must be excluded as that car was used solely for pleasure. As for the BMW, he admitted that solely 50 per cent of the bills claimed have been business-related. However the taxpayer was unable to supply a mileage log for the BMW or any receipts for gasoline and parking. The decide denied the whole lot of the taxpayer’s car bills.

Lastly, below the heading “workplace provides,” the taxpayer tried to deduct the price of an Apple Watch and laptop computer. The decide, apart from questioning the non-public utilization of the gadgets, concluded they have been capital bills and thus not deductible by an worker.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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