29 October 2008 External T.I. 2008-0287661E5 - Employee - Deductibility of Assistant Expenses

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:

1) Can an employee earning salary (with no commission income) deduct amounts paid to a self-employed assistant (i.e., assistant is not an employee)?

2) Can a commissioned employee deduct amounts paid to a self-employed assistant?

3) With respect to Form T2200, Question 9 asks: "Did you require this employee under a contract of employment to pay for a substitute of assistant?" In situations 1) and 2) above, is the question required to be answered "Yes" in order for the employee to deduct expenses relating to the assistant?

Position:

1) No.

2) Yes.

3) N/A for situation 1) and 2) above.

Reasons:

1) Subparagraph 8(1)(i)(ii) of the Act allows a taxpayer to deduct amounts paid in the year to an assistant or substitute. Where the assistant is a bona fide self-employed individual, the employee would not have paid the assistant "salary" for purposes of subparagraph 8(1)(i)(ii), as he was not the assistant's "employer".

2) If the employee were remunerated in whole or in part by commission, he would be permitted to deduct amounts paid to a self-employed assistant provided each of the conditions of paragraph 8(1)(f) were met.

3) Where an employee is non-commissioned, Q. 9 of the T2200 should ordinarily be answered in the affirmative in order to receive a deduction under subparagraph 8(1)(i)(ii). Here, no deduction is available. Where an employee is commissioned, this question should not be completed (the form specifically states: "Do not complete for employees earning commission income").

                                                2008-028766
XXXXXXXXXX                                      Renee Sigouin
                                                613-957-2128
October 29, 2008

Dear XXXXXXXXXX :

Re: Employee - Deductibility of Assistant Expenses

We are writing in response to your letter of July 21, 2008 wherein you requested our comments regarding the deductibility of amounts paid to a self-employed assistant by an employee ("Employee"), where the Employee is commissioned or non-commissioned. You have also posed a question regarding the completion of Question 9 of Form T2200 - "Declarations of Conditions of Employment" in this regard.

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Subsection 8(2) of the Act provides that no deductions are allowed in computing a taxpayer's income for a taxation year from an office or employment except as specifically enumerated in section 8 of the Act. In this regard, subparagraph 8(1)(i)(ii) of the Act allows a deduction from employment income for amounts paid in the year as expenses for office rent, supplies and salary to an assistant or substitute. As discussed in paragraph 1 of Interpretation Bulletin IT-352R2 - "Employee's Expenses, Including Work Space in Home Expenses", such expenses are deductible provided the following requirements are met:

a) the taxpayer is required by the contract of employment to pay for such office rent or salary, or to provide for such supplies;
b) the taxpayer has not been reimbursed and is not entitled to reimbursement for such expenses;
c) the expenses may reasonably be regarded as applicable to the earning of income from the office of employment; and
d) in the case of supplies, they are consumed directly in the performance of the taxpayers duties of the office or employment.

For purposes of requirement (a), it is our view that a taxpayer is "required by the contract of employment" to pay an assistant's salary where there is a formal contract of employment stating that payment for assistance is to be borne by the employee. Where there is no complete written contract of employment and/or the terms of employment are completed by verbal agreement, this requirement can still be satisfied where it is implied in the employment contract that the employee is required to pay the particular employment expense in question. In order to determine if an expense incurred by an employee, that was not expressly required in the contract, was actually an implied requirement of the office or employment, the courts have reviewed whether failure to meet the requirement could result in cessation of employment, poor performance evaluation or other disciplinary action on the part of the employer. This is a question of fact to be determined upon a review of the particular circumstances.

To address your enquiry, it is necessary to consider the interpretation and meaning of "salary" as stated in subparagraph 8(1)(i)(ii) of the Act. We note that for purposes of various provisions in the Act, including section 8, the term "salary or wages" is defined in subsection 248(1) as "the income of a taxpayer from an office or employment". The meaning of "salary" for the purposes of subparagraph 8(1)(i)(ii) was examined in a Tax Court of Canada case called Cruikshank v. MNR, 85 D.T.C. 633. In this case "salary" was defined according to the Oxford dictionary as "a fixed payment made by an employer at regular intervals to a person doing other than manual or mechanical work". It is our opinion that the use of the word "salary" in this provision only contemplates payments made by an employer to an employee.

Accordingly, where the assistant is a bona fide self-employed individual, the Employee would not have paid the assistant "salary" for the purpose of subparagraph 8(1)(i)(ii) of the Act.

In a situation in which a commissioned employee retains the services of an assistant, the amount would not be deductible under subparagraph 8(1)(i)(ii) of the Act, for the same reasons described above. However, paragraph 8(1)(f) of the Act may also have application. This provision is worded more broadly than subparagraph 8(1)(i)(ii) of the Act. It provides a deduction for taxpayers employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, where the taxpayer:

• Was required to pay his own expenses under the contract of employment;
• Was ordinarily required to carry on the duties of employment away from the employer's place of business;
• Was remunerated in whole or in part by commission or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated; and
• Was not in receipt of a travel allowance in the year that was excluded from the taxpayer's income under subparagraph 6(1)(b)(v) of the Act.

However, it specifically excludes outlays, losses or replacements of capital or payments on account of capital. The expenses are also subject to the usual test of reasonableness.

It is our view that a commissioned employee would be permitted to deduct amounts paid to a self-employed assistant provided each of the conditions of paragraph 8(1)(f) of the Act were met.

With respect to Form T2200, subsection 8(10) of the Act requires that an employee claiming a deduction under paragraph 8(1)(f) of the Act file with the taxpayer's return for a taxation year, a prescribed form signed by the employer certifying that the conditions set out in that paragraph were met in the year for the employee. This is confirmed in paragraph 13 of IT-352R2.

However, in relation specifically to the completion of Question 9 of Form T2200 relating to "pay for a substitute or assistant", we note that the form specifically states "do not complete for employees earning commission income."

We trust these comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch