A March 4, 2016 Federal Court of Appeal case (Urquhart vs. H.M.Q., A-56-15) addressed the deductibility of employment expenses incurred by a car salesman. Such expenses included mobile phone charges, postage for sending cards to clients, promotion costs, and gifts to mechanics. In addition, the taxpayer incurred costs to bring cars to his dealership for delivery to customers such that he could obtain a higher commission (as opposed to the commission that would be paid on cars not already shipped) and costs of purchasing and installing accessories on certain cars sold. The Tax Court denied all employment expenses as the expenses were not required under the employment contract.

Taxpayer wins, in part
The Court opined that when determining whether an expense is required under the contract of employment, as required for an expense to be deductible (Paragraph 8(1)(f)), the contract should be reviewed objectively to determine whether it was implied that the employee would be required to incur costs to earn commission income.

The taxpayer’s evidence of invoices and charge backs demonstrate a mutual understanding that expenses to deliver the cars to the taxpayer’s dealership and purchasing of accessories that were to be included on the car were required. Without incurring these expenses, the taxpayer could not deliver the product that the dealership had agreed to deliver to the client. These expenses were allowed.

employment expenses must be required – helping produce income is insufficient

The Court then reviewed expenses incurred to build client relations. Although these expenses helped to produce income, they were not required under the contract. Without such a requirement, they were not deductible.

Editors’ Comment
The deductibility of employment deductions is significantly more restricted than the requirement that expenses incurred to earn business or property income be incurred for the purpose of earning income (Paragraph 18(1)(a)).