Written on behalf of Feigenbaum Consulting
People who run their own businesses enjoy the ability to deduct a number of expenses from their income, such as instances where a spouse provides work for them in exchange for payment. Salaried employees, however, are not able to make similar claims without jumping through some significant hurdles. A recent decision from the Tax Court of Canada serves to highlight this important distinction.
A Full-Time Sales Manager Working From Home
The appellant was employed as a sales manager in Canada for a large multinational manufacturer of dental instruments headquartered in Chicago. The company did not have a Canadian office. While working for the company, she hired her husband to act as her assistant. Her income was just under $200,000 per annum, and when filing her tax returns she claimed employment-related expenses of over $80,000, with half of that being related to her husband’s role as her assistant.
The appellant was a salaried employee and listed the expenses on a T2200 form provided to her by the company. Other expenses on the form were related to business travel, as she spent about 80% of her time travelling.
The company provided a letter with the T2200 form, which said the appellant “is responsible for overseeing the activities of a number of sales representatives. If she believes she requires an administrator or other assistance to perform her duties, this is her decision. We do not, as company policy, fund the expense of engaging an assistant. We have amended the T2200 (copy attached) to reflect that (the appellant) employs someone to assist her with her job duties. At part 9, we have changed ‘paid for a substitute or assistant’ from ‘No’ to ‘Yes’.” (emphasis added by the court).
Requirements Under the Income Tax Act
Subparagraph 8(1)(i)(ii) of the Income Tax Act allows people to deduct the “salary” paid to an assistant if having the assistant was required for their employment. The keyword in the Act is “salary,” which means the assistant must be an employee of the person claiming the expense and not just someone who works as a contractor. The court noted that the husband was not working in the capacity of an employee for his wife. The court also noted that he charged an hourly fee for his services, reporting it as professional income, and claimed 75% in expenses. The appellant did not deduct income tax, CPP or EI from the pay her husband received.
The court also found that the husband wasn’t ever actually paid by the appellant. The two shared a joint bank account and transfers of payment were never made. The court was also critical of the hourly rate of $75 charged by the husband.
This case is a good lesson that if someone wishes to hire their spouse as an assistant, they must ensure that it is required as part of their job, and they must actually hire the spouse as an employee rather than treat them as a contractor, in order to deduct their salary under the Income Tax Act.
Contact the experienced team at Feigenbaum Law to discuss how we can help you reduce your overall tax burden and shield you from liabilities with respect to your business-related expenses. We offer services to clients in the US, Canada and around the world. Contact us online, or call us at (905) 695-1269 or toll free at (877) 275-4792 to learn more about how we can help.