CRA Assessments: Employment Expenses for the Owner/Manager

In March of 2016 the Canada Revenue Agency asked the government for $444.4M in budget allocation for personnel to be tasked with the review of files for potential assessments.  CRA represented that expected to recover approximately $2.6B in tax revenues. In March of 2017 CRA asked the government for a further $523M for even more hiring.

We are now seeing the effects of the spending spree. CRA is conducting a number of “projects” that we have commented on earlier, i.e. professional fees and promotion expenses.  The latest “attack” is on employment related expenses claimed by owners of private companies. CRA is in particular denying auto, home, office and travel expenses claimed as employment expenses by owner/managers on the basis only of a recent Tax Court of Canada decision, not the ITA or CRA guidance.  Any owner/managers who are claiming these employment expenses could find themselves with a large and retroactive tax bill.

In Morton Adler v. Queen (2009), Judge Webb ruled that even though the employment relationship was formally documented, the employment expenses claimed by the owner/manager were not deductible because there could be “no adverse consequences” to the owner/manager, as employee, if he failed to pay those employment expenses.  Citing Queen v. Cival, Judge Webb said that the employee would “not have been suable by his employer for breach of contract”.

CRA’s position on these expenses is to deny them with a re-assessment and let any adventurous taxpayer attempt to argue their admissibility.  We will be contacting our clients who may be exposed to this new risk to provide guidance for prior years and proactive advice for 2017 and subsequent years.

Shawn Bausch is a Tax Manager at Sloan Group. Set up a free tax consultation today with Shawn at or 416-665-7735, extension 335.

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