Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the cost of a basic cellular service plan is deductible from an employee’s employment income under the Act.
Position: It is a question of fact.
Reasons: See response.
Author: Underhill, Cynthia
Section: 6(1)(a), 8(1), 8(1)(i)(iii)
July 19, 2016
Individual Returns Directorate Income Tax Rulings Directorate
Assessment, Benefit, and Business and Employment Division
Service Branch Cynthia Underhill
Attention: Sheila Barnard 2015-060363
Deductibility of the cost of a cellular service plan
We are writing in response to your email dated August 13, 2015, concerning the deductibility of the cost of a basic cellular service plan (basic service plan) under the Income Tax Act (Act). More specifically, you asked whether an employee may deduct the basic service plan from employment income under subparagraph 8(1)(i)(iii) of the Act, where an employer requires the employee to use a cellular phone to perform employment duties.
Our comments are based on the following general assumptions: the employee does not earn commission income and the employer does not reimburse the employee for any costs, including hardware.
Subsection 8(2) of the Act provides that no deductions are allowed in computing an individual’s income from employment except as specifically authorized under section 8. Generally, these deductions are restricted to certain expenses incurred while performing employment duties.
Subparagraph 8(1)(i)(iii) of 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.” The word “supplies” and the phrase “consumed directly” are not defined in the Act. Where the legislation does not define a term, we generally rely on case law and the ordinary meaning (e.g., dictionary definition). Accordingly, for the purposes of subparagraph 8(1)(i)(iii) of the Act:
* the word “supplies” has a very restrictive meaning and is limited to materials or things that can be used up; and
* the phrase “consumed directly”, means that the supplies must be used up and play an integral and essential part in the performance of the employment duties.
Therefore, 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. Where this is substantiated, the cost of the supplies may be deducted under subparagraph 8(1)(i)(iii) of the Act if the employee was required under the contract of employment to provide and pay for the supplies. 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. The cost of the cellular minutes and data consumed directly in the performance of employment duties may be deducted from employment income under subparagraph 8(1)(i)(iii) of the Act only if the employee was required by the contract of employment to supply and pay for the cellular minutes and data and the cost is reasonable. It is a question of fact whether an employee was required by his or her employment contract to use a cellular phone to carry out his or her duties of employment and whether the cellular minutes and data used played an integral and essential part in the performance of those 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 subparagraph 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 a cellular phone is used for employment and personal purposes, the cellular minutes and data consumed directly in the performance of employment duties must be substantiated and the cost determined.
You have implicitly asked if the basic service plan can be apportioned based on personal and employment usage. Where 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., portion of basic service plan for data cannot be deducted). Your branch will have to decide whether:
* an employer-signed Form T2200, Declaration of conditions of employment, is sufficient evidence that the use of a cellular phone was required under the employment contract;
* employment use has been substantiated;
* the basic service plan is reasonable; and
* the basic service plan has been apportioned between employment and personal use on a reasonable basis.
As to whether the Canada Revenue Agency’s (CRA) administrative policy, Cellular phone and Internet services, can be extended to the employment expense deductions, we note that the policy only applies to benefits received from employment that are required to be included in an employee’s income under paragraph 6(1)(a) of the Act. When determining whether a benefit is included in employment income, the CRA and the courts consider who the primary beneficiary of the benefit is. Since the deduction of an employment expense does not consider who is the primary beneficiary of the expense, this policy cannot be extended to employment expense deductions. Furthermore, section 8 does not support the application of such a policy to employment expense deductions.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We trust these comments will be of assistance to you.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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