6 March 2006 External T.I. 2004-0103391E5 - Repayment of salary

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 a person employed as a commission employee selling financial products can deduct amounts paid to a past employer for a commission chargeback and an error on trade against income from a subsequent employer.

Position: No.

Reasons: Paragraph 8(1)(f) of the Act provides for a deduction from income, "where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and ....amounts expended by the taxpayer in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year) to the extent that those amounts were not ...". It is our view that, the references to "the taxpayer's employer" and "the employment" means expenses incurred to earn income from a specific are deductible only from income for that employer

									2004-010339
XXXXXXXXXX 								Charles Rafuse
(613) 957-8967
March 6, 2006

Dear XXXXXXXXXX:

Re: Paragraph 8(1)(f)

We are writing in response to a letter of November 12, 2004 from XXXXXXXXXX and our telephone conversation of December 15, 2005 (XXXXXXXXXX/Rafuse), concerning a technical interpretation regarding paragraph 8(1)(f) of the Income Tax Act (the "Act").

Facts

Our understanding of the facts is as follows:

1. Mr. X changed employers from Firm A to Firm B.

2. At all relevant times, Mr. X has been employed as a "commission employee" such that all the requirements of paragraph 8(1)(f) have been met.

3. Mr. X is licensed to sell a variety of financial products, including life insurance, mutual funds and marketable securities.

4. Prior to leaving Firm A, Mr. X was required to pay Firm A $27,000 for a "commission chargeback" and $40,000 for an "error on trade".

5. The commission chargeback was due to the premature collapse of a life insurance policy sold in a prior year.

6. The error on trade resulted from Mr. X incorrectly processing a client's instructions on a transaction involving a sale of mutual funds.

7. Mr. X is required under his employment contract to repay Firm A for commission chargebacks and errors in trade.

8. Mr. X would be fired if he failed to make such payments.

9. The income from Firm A in the year is $4,000 with $3,000 expenses and the deductions sought are an additional $67,000.

Our Comments

Paragraph 8(1)(f) of the Act provides for a deduction from income, "where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and ....amounts expended by the taxpayer in the year for the purpose of earning the income from the employment (not exceeding the commissions or other similar amounts referred to in subparagraph (iii) and received by the taxpayer in the year) to the extent that those amounts were not ...". It is our view that, the references to "the taxpayer's employer" and "the employment" means that expenses incurred to earn income from a specific employer are deductible only from income for that employer. Accordingly, we are of the opinion that the deduction that Mr. X can claim for amounts that he was required to repay Firm A under his employment contract is limited to his income from such employment which is $1,000.

We trust this information is helpful.

Yours truly,

Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch