Advice from CRA for Shareholder-Employees Claiming Employment Expenses

Practitioners sometimes deal with owner-managed clients who have questions about deducting employment expenses on their income tax returns. The Canada Revenue Agency offers the following advice to employees who are also shareholders.

The taxpayer must satisfy two key conditions:

1. The expenses were incurred as part of employment duties, and
2. The taxpayer was required to pay for the expenses personally as part of their employment duties.

These conditions can be satisfied as follows:

1. The expenses were incurred as part of employment duties, and not as a shareholder.

   The taxpayer must establish that the expenses were incurred in their capacity as an employee and not a shareholder. To do this, the taxpayer must be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at the company, or at other businesses similar to the company in size, industry, and services provided.

   The taxpayer does not need to include this information on their tax return or the Form T2200 Declaration of Conditions of Employment, however, the CRA could ask the taxpayer to provide this later.

2. The taxpayer was required to pay for the expenses personally as part of their employment duties.

   Usually, a written contract of employment specifies the expenses a non-shareholder employee must pay. Sometimes there is no written contract or the requirement to incur expenses is not clearly identified in the contract, but there is an implied requirement for the employee to pay the expenses.  For example, an employee can demonstrate an implied requirement by showing they face possible disciplinary action from their employer if they do not meet the requirement.

   For shareholder-employees however, an implied requirement might be more difficult to demonstrate and a written contract might not be adequate to establish that the taxpayer was required to pay for the expenses as part of their employment duties.

   To satisfy this condition, the taxpayer must, therefore, be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at the company, or at other businesses similar to the company in size, industry, and services provided. This will support that the taxpayer was required to pay the expenses to fulfill their obligations in their capacity as an employee.

The taxpayer must satisfy both key conditions to deduct the expense(s) on the T1 Individual Income Tax Return. If both conditions are met, the taxpayer may, as a shareholder, have the authority to certify Form T2200, Declaration of Conditions of Employment, for themselves or a related employee.