Hi everyone
Hope you enjoyed my two recent articles linked to Non-Residents. These articles can be found with the rest of the real estate blogs I have written in the past, here.
Today I turn my attention back to the residents of Canada
and have decided to write about those that have employment related expenses,
and receive a form T2200 from their employers to be able to deduct these
expenses.
What is a form T2200? This is a form filled out mainly by employers, and
without this form an accountant usually would not deduct any employment related
expenses for the taxpayer. Why is that you ask? Well the form T2200 determines
the conditions of employment that an employee is subject to, and specifies if
the employee can deduct vehicle related expenses.
However there are times that the employer reimburses per mileage or a flat rate, also if the employee works from home, what percentage of the time does that employee work from home? The form explains what these conditions are, and gives an accountant the information they need to be able to help the taxpayer.
There are 2 types of employees: the ones that earn a salary and bonus, and those that earn commission. Regarding employment expenses, I will explain the differences each can deduct. So we are clear right off the bat, I will not be able to explain every detail, but I will give you general knowledge so that you can better prepare for your accountant when it comes to presenting the information.
Home Related Expenses
The easiest deductible expenses to explain are home expenses. For home expenses, the employer must fill out section 10 which asks “Did this employee’s contract of employment require him or her to use a portion of his or her home for work?” To qualify for home expenses, the employee must meet two conditions: first, the employer must answer “yes” to this question, and second, they must work from home greater than 50% of the workweek OR must entertain clients from home on a regular basis. In this case, it’s unlikely an employee will be required to see a client from home on a regular basis therefore greater than 50% working from home makes more sense.
The next step for the taxpayer is to determine what percentage of their home they use as a home office. This is not just a random number, and some think it’s the percentage of the time they work from home. However, the percentage is determined based on the amount of space one uses out of the total square footage of their home. This could include an office used in the home, a storage space and a washroom used, just like how someone at an office would have the rights to these spaces.
We have established the home usage, but what are the differences for a salaried employee and a commissioned employee? In the case of a salaried employee they can only deduct maintenance, utilities and if they are renting their principal residence. However if we are dealing with a person who earns commission income they are able to deduct insurance and property taxes if they own their principal residence. A taxpayer receives greater benefit if they rent since the biggest expense one pays for a home is either rent or mortgage. With mortgage payments, interest expense which is usually deductible is not in this case.
In the case of a commission earner, the total amount of expenses (including home and other) are capped at the amount of commission one earns. However in the case of expenses of a salaried employee they are not capped, and remember the deductions are fewer.
Vehicle Related Expenses
The biggest expense a taxpayer would pay out of pocket as a condition of employment is vehicle related expenses. In this situation there are 2 ways that an employer reimburses an employee. The first is on a per KM payment, based on a rate that is below the CRA guide which is posted every year. If this rate is below the CRA mileage rate posted on the site then the company does not need to report the KM reimbursement on the employee’s T4. The second way is if the company reimburses the employee on a flat rate per month. With this method since it is not a reimbursement of a direct expense the employer will need to add the monthly rate on the employees T4 and the employee will have to pay tax on this amount since it is a taxable benefit.
When an employee is required to use their own vehicle as a condition of their employment to visit client sites, they will be able to deduct these vehicle related expenses ranging from gas, maintenance, insurance, finance interest, licensing, lease or vehicle depreciation. In a case where an employer has paid a flat monthly fee, since it is already taxed, the employee can deduct these vehicle related expenses using the percentage used for employment driving, not including their driving from home to their office. When the employee has been reimbursed per KM by the employer, the employee can still deduct their vehicle expenses. However they need to add back the KMs reimbursed by the employer on their tax return, and this number would be posted on the T2200 in section 5.
Unlike with home expenses, the deductions for vehicle expenses are the same for a commissioned employee and a salaried employee. The only difference being that a commissioned employee can max their expenses against their commission income only if their commissioned income is low and their expenses high. In this case, they should go the salaried employee expense deduction route. However, as mentioned earlier, they will have fewer expenses they can deduct overall.
Other Expenses
There are some differences for commissioned employees. For instance, they can deduct reasonable monthly expenses for cellphones and computer leasing, but they are unable to deduct any asset depreciation for either cellphone or computer. A salaried employee one can only deduct long distance charges directly linked to employment.
For accounting/legal expenses, a commissioned employee can deduct expenses related to almost any accounting fees including tax preparation fees. A salaried employee can only deduct any legal fees they paid in the year to collect or establish a right to collect salary or wages. There are some accounting expenses a salaried employee can deduct.
Meals, entertainment and travel costs are only deductible by commissioned employees. For travel costs, oftentimes employers reimburse these expenses to the employee. However, meals and entertainment are often capped and sometimes employees will have to spend out-of-pocket to appease their clients. In this case, a salaried employee will not be able to deduct these expenses paid out-of-pocket.
Even auditors can mistake certain types of expenses and allow certain expenses to go through. A well-educated accountant will know their rights and make sure they do not get handled by an auditor.
Salaried and commissioned employees can also be reimbursed the GST/HST they pay on their expenses, assuming they work in an industry where they sell a service or supply that is not exempt of HST. To do this, they would need to fill out form GST370 (including their employer’s GST/HST number) and make sure the employer signs off on the form. Oftentimes an accountant will not need this until their client gets audited.
Remember: this is just a guide, and I always recommend that you speak with an accountant to make sure you are well prepared for these deductions.
Do you have a specific topic you want me to talk about? Please ask here so that I may write about it in my future blogs.