Accounting Temp Services Inc.
180 Waterloo Ave N1H 3J3 Guelph, ON, Canada

This is an article that appeared in a tax group I follow on Linkedin. It is bad news for people that deduct employment expenses. Les Kirsh Owner, Harris & Partners, LLP... New CRA employment expense project We just received a very unusual reassessment for one of our clients. They received a non-standard audit letter requesting everything under the sun to support personal automotive and home office employment expenses claimed. All receipts, mileage logs, house plan, contract, and T-2200 etc were submitted. The employee is the spouse of the owner and is legitimately employed in the business and indeed does use her car and home office as documented. CRA disallowed all expenses on the basis of a case, Morton Adler vs. the Queen (2010 DTC 1020) whereby the taxpayer/employee would have to prove that there would be adverse and/or negative consequences with respect to their employment if they did not use their car or home office and as a spouse of the shareholder, this could not be substantiated as there was little or no risk of the company suing her for breach of contract if she failed to perform her duties with her car and home office etc nor would she suffer consequences of a negative performance review etc. The court interpreted this as that these expenses were therefore not a requirement of employment and consequently the taxpayer could not deduct said expenses. The agent indicated that this is a special CRA project for 2017/18 and that there would be many more reassessments forthcoming on the basis of this case. I’d be interesting in hearing if anyone else has experienced this and whether you think an appeal would be worth the effort. It is an unduly harsh result as it prohibits owner managers or working relatives from claiming employment expenses.

This is a discussion on one of the tax sites I follow and it deals with the age old question of capital gains treatment (1/2 of the gain added to taxable income vs income treatment (full gain added to taxable income) As you can see from the questions and answers by trained professionals the income tax laws are a minefield. "Business income vs capital gains for real estate agent" Question:... A real estate agent is approaching retirement. He sold 1 of his own rental properties every 2 years in last 10 years, including his principle residence. CRA challenged him and determined that the gains on dispositions were business income and not capital gains, and denied his principle residence exemption. The rental properties were all rented out for sometime before disposition. He still has a few properties now. What can be done to ensure that the future dispositions are capital gains and not business income, if possible? Answer 1 Is he disputing CRA's assessment that his real estate sales are on income account? "Capital versus income" is a fact-based determination, which is challenging, and there are probably factors indicating "income" (like being in the real estate business, and having a steady stream of transactions) and others that indicate capital (like generating rental income and residing in the property). Were the properties listed constantly, or sold on unsolicited offers? Did the tenants rent month to month, or sign long-term leases? Were the properties clear title and generating monthly income and positive cash flow, or heavily leveraged with no hope of generating a return unless they appreciate and sell at a profit? Lots of other facts may be relevant. I expect that, if he accepts being reassessed as being in the business of buying and selling real estate that he rents short-term, or lives in when convenient, CRA will expect future gains to be reported consistently with his past gains. Answer 2 I am not sure what his occupation has to do with the principle residence exemption unless he has been moving in and out of "principle residences". i would think that if he stayed in a house over a long period of time, he should be allowed the PR exemption. Answer 3 It sounds like this CRA auditor was simply following the standard protocols of the Real Estate Transaction project. I have seen this CRA approach many times. Unfortunately, the problem is very sticky and it takes quite a bit of skills, experience and patience to shake it off. Answer 4 The best thing he can do is fight the assessments. Having a successful conclusion at appeals should be the end of it as time would seem to be the only extraneous factor. Answer 5 I also don't think CRA is following it's protocol. If they are rental properties (and I assume have been so for several years), the CRA protocol is to assess as capital unless factors establish a secondary intention to flip. His profession should not be the sole reason.

I always look for humour when doing tax returns. One self employed client had an expense on his list called "Fun". I smiled when I told the client it was not tax deductible because CRA does not believe in people having fun. :-)

Received this email today from CRA. I posted a note about this a month or so ago. It would appear that CRA is going to make this a pet project. Be prepared, and if you have questions please call me at 519-763-8285 or 416-578-0909. I have at least one acting client whose previous tax preparer used this line to deduct acting expenses. "Employment expenses review... Each year, the Canada Revenue Agency reviews a number of returns to ensure that taxpayers are entitled to the claims that they have made, and that amounts claimed have been correctly calculated. These reviews are an important part of our compliance activities to maintain the integrity of, and Canadians' confidence in, Canada’s tax system. In the fall of 2017, the CRA began reviewing a small percentage of individual tax returns when we detected a trend in the normal course of our regular reviews. The review focused on other employment expenses claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. Based on the feedback we received from industry stakeholders in recent weeks, it became clear that there was confusion among taxpayers, who were the subject of these reviews, as to how they should be claiming other employment expenses. The Canadian tax system is based on self-assessment, which is in turn supported by clear guidelines for taxpayers and their representatives. In this case, the Agency agrees with our industry stakeholders that additional consultation and new guidance products are necessary. Effective immediately, the Agency will stop reviewing and disallowing other employment expenses claimed on line 229 of the T1 Individual Income Tax and Benefits Return by shareholder-employees. We will also reverse those reassessments specific to line 229 already issued during the review period September 1, 2017 to February 10, 2018. Specifically, taxpayers who were major shareholder and owners of a corporation and received a letter from the Special Assessment Program of the Canada Revenue Agency dated between September 1, 2017 and February 10, 2018 indicating that they were reviewed for other employment expenses claimed on line 229 of the T1 Individual Income Tax and Benefits Return Taxpayers involved in these reviews will be contacted by letter to inform them of this decision. Consultation will be undertaken with stakeholders in the tax professional community to clarify the requirement of employer certification under Subsection 8(10) of the Income Tax Act as it relates to shareholder-employees. It is expected that clarification will be issued to take effect in the 2019 tax year. The Agency will issue guidance products on this issue well in advance of any future reviews to allow taxpayers, and their representatives, reasonable time to adjust to their tax filing requirements."