28 October 1997 External T.I. 9716215 - CHOICE OF DEDUCTIONS FOR COMMISSIONED SALES 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

When can a commissioned sales employee (who earns both commission income and salary income) choose to apply paragraph 8(1)(f) as opposed to 8(1)(h), (h.1), or (i) of the Act?

Position:

If employee chooses 8(1)(h) and/or (h.1), cannot claim deduction for any expense under 8(1)(f). In this case, home office expenses would have to be claimed under 8(1)(i)(ii) and (iii).

Reasons:

Because of mutual exclusivity imposed by 8(1)(h)(iv) and 8(1)(h.1)(iv).

XXXXXXXXXX                                      					971621

Attention: XXXXXXXXXX

October 28, 1997

Re: Paragraphs 8(1)(f) and 8(1)(i) of the Income Tax Act (the "Act")

We apologize for the delay in replying to your letter of June 11, 1997, in which you ask whether an individual who earns both commission and employment income is required to claim certain expenses solely under paragraph 8(1)(f) of the Act or may claim expenses under such other provisions as paragraphs 8(1)(h), (h.1), (i) or (j) of the Act. In responding to your query we assume that the taxpayer meets all the conditions as set out in subparagraphs 8(1)(f)(i) through (iv) of the Act. Our comments follow.

As you point out, the annual deduction under paragraph 8(1)(f) of the Act is limited to the amount of commission income received by the taxpayer in the year while the deductions under paragraphs 8(1)(h), (h.1), (i) and (j) are made in computing the taxpayer's income from the office or employment to which the expense relates, thus including both commission and salary income if earned in a single employment (hereinafter referred to as "the employment"). However, paragraph 8(1)(f) generally permits a deduction for a greater number of expenses than does a combination of any of the other subsection 8(1) deductions. It may therefore be advantageous to the taxpayer to choose one or the other of the deductions depending on the amount of the commission income or the type of the expense. However, the taxpayer is not free in all cases to take advantage of both paragraph 8(1)(f) and the other provisions in question.

The expenses relating to interest and capital cost allowance on the employee's vehicle are not deductible under paragraph 8(1)(f) and can only be claimed under paragraph 8(1)(j) of the Act whether the employee earns only salary or a combination of salary and commission income. In other words, the deduction is made in computing the taxpayer's income from the employment which income would include both the commission and salary income, and a claim under paragraph 8(1)(j) of the Act does not preclude a taxpayer from claiming other expenses as set out in paragraph 8(1)(f) of the Act.

However, the deductions under paragraphs 8(1)(h) or (h.1) of the Act for travel expenses and motor vehicle travel expenses cannot be claimed by a taxpayer who wishes to claim a deduction in accordance with paragraph 8(1)(f) of the Act. (See subparagraphs 8(1)(h)(iv) and 8(1)(h.1(iv) of the Act with respect to this condition). It is the Department's position that the taxpayer may choose whether to apply either paragraph 8(1)(f) or one or both of (h) and (h.1). This is covered in the Example at page 5 of the 1996 Employment Expenses Guide. But once the taxpayer has opted to apply one or both of paragraph 8(1)(h) and 8(1)(h.1), the taxpayer will be unable to claim the other expenses exclusive to paragraph 8(1)(f) of the Act such as the costs of advertising and promotion, property taxes and house insurance relating to a home office, and what you describe as "salesmen expenses". Again, deductions in accordance with paragraphs 8(1)(h) and (h.1) of the Act are, like the deduction under paragraph 8(1)(j), made in computing the taxpayer's income from the employment and are not limited to the amount of the commission income.

With respect to the expenses relating to a work space in the home, the deduction can be claimed by the taxpayer under either paragraph 8(1)(f) or 8(1)(i) of the Act. As noted above, where the choice is made to apply paragraph 8(1)(h) and/or 8(1)(h.1) of the Act, the taxpayer will be unable to claim home office expenses in accordance with paragraph 8(1)(f) of the Act and will be limited to those expenses identified in subparagraphs 8(1)(i)(ii) and (iii) of the Act.

You also asked why property taxes and insurance relating to the home office are permissible deductions under paragraph 8(1)(f) and not paragraph 8(1)(i) of the Act. The difference lies in the words used in each provision. The relevant words in paragraph 8(1)(f) are:

where the taxpayer ... under the contract of employment was required to pay the taxpayer's own expenses, ... amounts expended ... for the purpose of earning income (except) outlays, losses or replacements of capital or payments on account of capital ... (or) outlays or expenses that would, by virtue of paragraph 18(1)(l), not be deductible in computing the taxpayer's income for the year if the employment were a business carried on by the taxpayer.

The relevant words in subparagraphs 8(1)(i)(ii) and (iii) are:

amounts paid by the taxpayer in the year as ... (ii) office rent ... the payment of which was required by the contract of employment (and) (iii) the cost of supplies that were consumed directly in the performance of the duties of the office or employment and that the office or employee was required by the contract of employment to supply and pay for.

Cases on the meaning of subparagraph 8(1)(i)(ii) of the Act indicate that on its plain meaning "office rent" does not include an allocation of costs relating to the taxpayer's own home. Rather it connotes only a payment for use of property arising out of a landlord and tenant relationship. (See, for example, Felton v. MNR 89 DTC 233 and The Queen v. Thompson 89 DTC 5439). Thus, if a taxpayer works out of his own home, it is only subparagraph 8(1)(i)(iii) of the Act which applies to permit the deduction of the costs of supplies consumed, such as heat, electricity, and water.

However, if a commission sales employee uses part of his or her house, a reasonable portion of the property taxes and house insurance is also deductible because the words used in paragraph 8(1)(f) of the Act are wider in scope. For a comparison of the two deductions, please refer to Interpretation Bulletin IT-352R2 ("Employee's Expenses, Including Work Space in Home Expenses") at paragraphs 5 and 6. (Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.rc.gc.ca).

Where the taxpayer applies paragraph 8(1)(i) of the Act for purposes of the home office expenses, subsection 8(1) of the Act limits the deduction to the amount of the income to which the expenses relate. The paragraph 8(1)(f) deduction can be applied only against the commission income and cannot be used to reduce any salary received from the same employer. In either case such expenses, however, can be carried forward indefinitely and deducted from the related income in subsequent years. Other limitations concerning the home office expense deduction are contained in subsection 8(13) of the Act which is discussed in paragraphs 2 through 4 of IT-352R2.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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