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As you scramble to collect all of your tax data to satisfy the Canada Income Company‘s looming Could 1, 2023, common submitting deadline for 2022 private tax returns, you must take particular care to make sure that you might have applicable backup for any bills you propose to assert.

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Failure to supply ample receipts or documentation to assist these bills may land you in scorching water with the taxman, as one taxpayer just lately discovered when making an attempt to assert employment bills on her 2016 and 2017 returns.

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The tax case, determined earlier in April, concerned a Vancouver taxpayer who was employed as a “household service adviser” by a big funeral dwelling conglomerate. Her employment duties included making cemetery preparations for shoppers, promoting pre-need preparations for cemeteries and funeral houses, networking and constructing relationships to generate referrals, and establishing and sustaining robust enterprise relationships with consumer households.

She was very profitable at her job, incomes employment earnings, along with commissions, totalling $400,333 ($355,905 from commissions) in 2016 and $446,845 ($412,887 from commissions) in 2017. In these tax years, she incurred quite a lot of employment bills.

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Beneath the Earnings Tax Act, an worker who’s required to pay employment bills that aren’t reimbursed by their employer, including bills for a house workplace, could possibly declare a deduction on their return for such bills. To be entitled to deduct employment bills, the worker must receive a replica of a correctly accomplished and signed Kind T2200, Declaration of Situations of Employment from their employer.

Typical deductible employment bills can embody: sure meals, beverage and leisure bills; out-of-town lodging bills; parking; workplace provides; allowable motorcar bills; and even promoting and promotion bills.

The problem on this case, nonetheless, was that the CRA questioned whether or not the taxpayer really incurred all her bills. Particularly, the CRA disallowed $59,800 of promoting bills in 2016, and $58,000 in 2017, taking the view that they have been both not made or incurred by the taxpayer, or, alternatively, in the event that they have been certainly made or incurred, they weren’t completed so for the aim of incomes employment earnings, so that they weren’t tax deductible.

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It ought to be famous that the CRA did permit different promoting and promotion bills totalling $32,493 in 2016, and $17,602 in 2017. Why did the CRA permit among the taxpayer’s promoting bills, however not others? It appears the denied bills have been associated to providers allegedly supplied to the taxpayer by companies wholly owned by her partner and daughter.

In 2016, the taxpayer claimed an employment expense deduction for promoting and promotion bills totalling $29,900 for providers rendered by a company owned by her partner, and $29,900 for providers rendered by a company owned by her daughter. In 2017, she claimed a deduction for promoting and promotion bills totalling $29,000 for providers rendered by one other company owned by her partner, and $29,000 for providers rendered by one other company owned by her daughter.

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That every of the 4 funds in query to members of the family was slightly below $30,000 doesn’t wholly shock me. Years in the past, at a tax seminar I used to be giving in Halifax, I used to be requested by a monetary adviser: “What’s the magic quantity I can pay my spouse for ‘administrative providers’ earlier than the CRA begins questioning my tax deduction?” He had heard that it was $30,000.

Naturally, I responded that there is no such thing as a “magic quantity,” and that every one bills you intend to deduct in your tax return have to be “affordable.” In different phrases, the bills have to be just like what you’d pay an arm’s size social gathering. As well as, the bills should really be paid. This latter level gave the impression to be the problem within the present case for the reason that CRA took the place that the taxpayer “didn’t make or incur” the promoting bills.

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The taxpayer testified that she used numerous strategies for advertising and marketing and promoting her providers. Along with newspaper advertisements, charity galas and radio promoting, she additionally used the providers of her partner and daughter. The taxpayer defined that her daughter supplied “advertising and marketing providers” to her, which consisted of organizing occasions throughout numerous festivals, and organizing numerous campaigns the taxpayer hosted. She testified that her husband made numerous chilly calls to potential shoppers in an try to extend her gross sales. The taxpayer argued that by hiring her daughter and husband in 2016 and 2017, “she was extra profitable.”

The decide was skeptical that the quantities have been ever paid to the taxpayer’s daughter or husband, because the receipts introduced into proof confirmed neither an outline of the providers rendered, nor a technique of fee. No different supporting documentation to justify the quantities paid to the 2 companies, resembling time logs, financial institution statements, cheques, journal ledgers, data of calls made or particulars of providers rendered, was provided on the trial to substantiate the bills

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The decide cited a previous Federal Court docket of Attraction case that discovered the burden of proof is on the taxpayer to indicate that the bills have been incurred. “The earnings tax system is predicated on self-monitoring. As a public coverage matter the burden of proof of deductions and claims correctly rests with the taxpayer. The (taxpayer) … should keep and have obtainable detailed data and documentation in assist of the claims they make,” the court docket mentioned. Whereas there is no such thing as a want for a taxpayer to introduce “each single receipt,” the taxpayer nonetheless has to show, by some “credible means,” that the bills have been incurred.

The decide additionally famous that the absence of the taxpayer’s daughter and husband on the trial led her to attract “an adversarial inference, that’s, that their respective testimony would have proven that she didn’t pay their companies for the alleged advertising and marketing and promotion providers.”

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As well as, the taxpayer’s daughter was a full-time pupil on the College of British Columbia in the course of the tax years in query, so it was “not credible” that she would have rendered the alleged providers to the taxpayer whereas learning full time.

Consequently, the decide denied the promoting bills, concluding that “on a stability of possibilities,” the taxpayer was unable to show she had incurred the promoting bills.

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

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