DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Archive for the ‘Employment Income’ Category

Can Employees Deduct Cost of Cell Phone Plan?

In Canadian Income Tax, Employment Income on February 10, 2017 at 5:01 pm

Get_Smart

This should be an area of interest to pretty much anyone that owns a cell phone, so I thought I’d reproduce it here. It’s a recent CRA technical interpretation on the question of whether the cost of a cell phone plan is deductible from employment income.

Deductions from employment income must be specifically provided for under the Income Tax Act. Section 8(1)(i)(iii) deals with supplies used up in the course of performing employment duties. There must be a requirement under the employment contract for the employee to pay for his own supplies, and the employer must sign form T2200 to attest to this requirement.

The CRA was asked whether the cost of a basic cellular service plan is deductible from an employee’s employment income where an employer requires the employee to use a cellular phone to perform employment duties.

CRA Response: It is a question of fact. Section 8(1)(i)(iii) of the Income Tax Act (the “Act”) provides a deduction to an employee for “the cost of supplies that were consumed directly in the performance of the duties of . . . employment and that the . . . employee was required by the contract of employment to supply and pay for.” For supplies to be considered consumed directly in the performance of employment duties, the supplies must be used up and play an integral and essential part in the performance of the employment duties. The cost of the supplies should also be reasonable.

Based on the above, cellular minutes and data would be considered “supplies that were consumed directly” where it is determined that the cellular minutes and data were used up and played an integral and essential part in the performance of the employment duties. It is our understanding that service providers typically provide a detailed breakdown of each cellular minute used, but do not similarly provide a detailed breakdown of cellular data used. It is our view that without a detailed breakdown an employee would not be able to substantiate the amount of cellular  data that was used for employment purposes. Where the cellular minutes or data and costs cannot be substantiated, a deduction from employment income is not permitted under s. 8(1)(i)(iii) of the Act. If an employee can substantiate that they used their cellular phone exclusively for employment purposes (i.e., no personal use), it is our view that the basic service plan may reasonably reflect the cost of those cellular minutes and data. Where there is both employment and personal use and the employment use can be substantiated, an employee may apportion the basic service plan on a reasonable basis. However, if only the employment use of cellular minutes can be substantiated, only the portion of the basic service plan for minutes may be apportioned (i.e., the portion of the basic service plan for data cannot be deducted).

What’s Your Tax Issue? Credit Card Rewards

In Business Expenses, Canadian Income Tax, Employment benefits, Employment Income, Personal Tax on February 5, 2014 at 4:17 pm

Questions3The Tax Issue

What is the policy for using a personal rewards credit card to pay business expenses? Do I get taxed if I use the points I earned for business only. Will this raise red flags with CRA if I start spending 50k/month on this personal card?

The Answer

Believe it or not, the CRA has put so much thought to this question and changed their policy so often, I don’t blame anyone, including me for needing a quick refresher, so I’m glad you brought this up.

Basically, the CRA’s position is rooted in section 6 of the Income Tax Act, which essentially taxes an employee on the value of any employment-related benefit received in any manner whatever.

Regarding your question, the CRA’s general position has historically been as follows:

Where an employee accumulates points while incurring employment-related expenses which are reimbursed or paid for by the employer, the employee will be in receipt of a taxable benefit if the points are redeemed by the employee for personal travel or to obtain other personal benefits.

It is the employer’s responsibility to quantify the value of the benefits received by the employee, and include that amount on the employee’s T4 slip each year.

However, in 2009, the CRA modified its position, recognizing that it would be difficult for employers to quantify the benefit where the credit card was a personal one controlled by the employee. So, unless it’s a company credit card, the employer is off the hook. But the employee is not.

Well, not entirely. The CRA does acknowledge that it would be difficult for an employee to track personal expenses vs. business expenses on his personal credit card, so their position is that no taxable benefit will arise on points earned on a personal credit card. However, there are conditions.

No taxable benefit will arise on points redeemed from the use of a personal credit card, as long as:

  • the points are not converted to cash
  • the plan or arrangement is not indicative of an alternate form of remuneration, or
  • the plan or arrangement is not for tax avoidance purposes

The CRA provides an example of an employee who is allowed by her employer to pay for business expenses whenever possible through her personal credit card, for which she is reimbursed. In order to maximize her points, she uses her personal credit card to pay for various employer business expenses, including travel expenses of other employees.

The CRA would view this arrangement as being indicative of an alternate form of remuneration and would therefore not allow their administrative concession. The employee would have to calculate the value of the benefit and add that amount to her taxable employment income.

So, to finally answer your question, if you use your personal credit card mostly for normal personal use, and for your own normal business expenses for which you are reimbursed, the CRA would likely not charge you with a taxable benefit; however, if you suddenly start putting $50K/month of your employer’s business expenses on your personal credit card, I would say that it appears this might be a plan to increase your remuneration as outlined in the above example. And yes, the CRA might come knocking on your door.

CRA – The Anti-Santa

In Canadian Income Tax, Employment Income on December 16, 2013 at 9:00 am

It’s Christmas time, and that’s got the CRA thinking about gifts – taxing them, that is. The recent case of Shaw v. R. is a cautionary tale for anyone who believes that a gift of cash is never taxable to the recipient.

When a taxpayer tries to take advantage of technicalities in the Income Tax Act (“ITA”) to his advantage, it’s called an abuse of the provisions of the ITA. If the taxpayer is successful, the law is usually changed.

When the CRA taxes an amount of income twice, using the provisions of the law to its benefit, well, that’s just the way it is, end of story. In a previous article, we described a case where the CRA unsuccessfully attempted to tax the same amount of income twice. In the case of Shaw, they succeeded.

Mr. Shaw was a long time employee of a private company called Robert Ltd. Mr. Robert, the owner, apparently did very well and sold the assets of the company to CEDA International. At the time of the sale Mr. Robert had substantial amounts owing to him by his company which had been taxed as bonuses in previous years and credited to his shareholder loan account.

After the sale, Mr. Robert wanted to reward his long-time managers. He sent them each an amount of cash from Robert Ltd., representing $10,000 for each year of service, along with a letter thanking them for their loyal service, and assuring them that these amounts were tax-paid gifts that would be charged to his shareholder loan account and therefore not taxed in their hands. Only one condition was attached to the gift, and that was that they remain employees of CEDA International. Mr. Shaw received $140,000.

Section 6(1)(a) of the ITA provides that all “benefits of any kind whatever” are to be included as employment income if they were received “in respect of, in the course of, or by virtue of an office or employment.”

In this case, the court explained that subsection 6(1)(a) is a broadly worded provision and that the amounts received by Mr. Shaw fell into the category of a taxable employee benefit. The amount was calculated based on his number of years of service, and also came with the condition that he remain employed by the purchaser. Accordingly, the payment, regardless of who made it and what form it took, was made by virtue of Mr. Shaw’s employment.

What is unfair in this scenario is, of course, the fact that the amounts paid had been taxed previously; so in assessing Mr. Shaw, the CRA was essentially successful in taxing the same amount of income twice. It didn’t matter that the person who paid the amount was not the employer, nor did it matter that Mr. Shaw was no longer an employee of Robert Ltd. at the time the amount was paid.

This case should be seen as a warning to those who believe they can avoid tax by directing funds to another person on the premise that it is a gift. The CRA will always look to the underlying reason for any payment and apply the provisions of the ITA accordingly, regardless of whether or not it seems fair to the parties involved.

And no, don’t expect the law to be changed to prevent such an unfair result in the future.

Merry Christmas!