17 February 2009 External T.I. 2008-0273701E5 - Deductibility of costs for a commissioned employee

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: The taxpayer has installed a ground source heat and septic system at a cost of $40,000. Consequently, there are no monthly utility bills. How should the annual portion of deductible utilities be calculated in order to ensure the entitlement to the deduction is similar to other taxpayers who have more traditional forms of utility costs?

Position: The ground source heat and septic systems are capital expenditures. Subparagraph 8(1)(f)(v) explicitly denies the deduction of capital outlays by employees.

Reasons: Subparagraph 8(1)(f)(v) explicitly denies the deduction of capital outlays by employees.

XXXXXXXXXX

February 17, 2009

Dear XXXXXXXXXX :

This is in response to your letter dated March 27, 2008, requesting an interpretation on the deductibility of certain costs related to a home office of a commission sales employee. In particular, you are asking how to calculate the home office portion of utilities when the heat and water are provided by a ground source system and a septic system.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

A commission sales employee, who is entitled to claim expenses for a work space in the home, is allowed to claim a reasonable proportion of the utility expenses paid for the maintenance of the home. Paragraph 8(1)(f) allows the deduction of expenses (not exceeding the commissions) to the extent that such amounts are not outlays on account of capital, except as described in paragraph 8(1)(j). Paragraph 8(1)(j) allows for the deduction of payments on account of capital where the item purchased is either a motor vehicle or an aircraft.

You have stated that the expenditures for the ground source system and the septic system are approximately $40,000 and the systems are expected to last a number of years. Component parts of buildings such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment and heating equipment are considered to be capital expenditures under the Act. Under subparagraph 8(1)(f)(v) deductions for capital outlays by employees are explicitly denied.

You have raised the point that an entitlement to a deduction should be allowed in order to ensure similar tax treatment that is given to other taxpayers. The Act does not provide for an alternative deduction for the notional amount that would have been spent on utilities. In addition, the Tax Court of Canada dealt with the issue of the deduction of the capital cost of a computer for commissioned employees in Ronald Emmons v. HMQ 2006 DTC 2885. The court concluded that it would be improper to characterize the computer equipment as a current expenditure, if it would otherwise be classified as a capital expenditure for the purpose of earning income from business or property.

We trust these comments are helpful.

Lita Krantz
Assistant Director
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch