As a general rule, employees cannot generally claim expenses against income from their jobs under Canadian tax law. In contrast to businesses, which can generally deduct any expenses incurred in order to earn income from their business unless the tax codes tell them not to, employees require a specific rule which allow them claim expenses. Employees can also claim general deductions available to everyone (notably, legal fees paid to a tax lawyer in many circumstances).
Employees need to be required to bear expenses by their employer through an employment contract in order to be in a position to claim deductible expenses off their gross income.
Because of this strict rule, many issues with employment expenses are black-and-white. Because you need to meet specific conditions to claim any expenses, and the categories of expenses that can be claimed are restrictive, there is often not a lot of room to negotiate on these issues when dealing with the CRA.
Common employment expense disputes include whether an employer’s contract requires them to incur costs themselves, whether the employee is characterized as a certain type of employee (i.e. commission employee), and whether or not part of their expenses are truly personal in nature (i.e. such as expenses claimed for driving from one’s home to the workplace).
Employment Expense Disputes
Employment expense disputes typically start out with a “review” by the Canada Revenue Agency. Agents will reach out to taxpayers, requesting a T2200 form from their employer which is the form that authorizes the employee to claim employment expenses and copies of their receipts. Unlike formal audits, which the CRA usually saves for businesses or more complicated issues, employment expense reviews only rarely involve in-person meetings or visits from CRA officials.
CRA doesn’t disclose its screening practices; however, an employee will ordinarily face a review where it has claimed unusual expenses for their sector or position (for example, nurses claiming motor vehicle expenses).
Fraudulent tax preparers also frequently use fabricated employment expenses to inflate clients’ rebates. If that has happened to you, Kalfa Law may be able to contest any Gross Negligence Penalties assessed and could obtain relief from interest that has accumulated.
Once the agent requesting these documents receives a response from the employee, they will issue a decision, either allowing the claimed expenses or denying some and reassessing the taxpayer. Where the latter occurs, a Notice of Reassessment is issued which is essentially an amended tax bill.
CRA officers reviewing these claims rarely stray far from the receipts and T2200 sent to them—at this stage, the CRA officers don’t usually entertain legal arguments, alternative evidence such as bank statements, written explanations, or negotiation. It is a straightforward interpretation of the information presented to the CRA with little room for persuasive argumentation as there is in other stages of proceedings within the CRA or Tax Court of Canada.
As far as what to do when your employment expenses have been denied as a result of the above, employees may be able to simply re-submit receipts and an adjustment to their return. However, this process is slow and leaves them vulnerable to collections. As such, a more advisable course of action would be to proceed by filing a Notice of Objection to the Notice of Reassessment, which stops the CRA from collecting on the debt while another agent is assigned to adjudicate the issue. These agents have more latitude to come to their own conclusions. If the employee is still not satisfied with the decision of the CRA upon filing the objection, employees have a further right of appeal to the Tax Court of Canada.
Hiring an Employment Expense Tax Lawyer
Taxpayers should think careful about choosing representatives in employment expense cases. Employment expense disputes typically involve $5,000-$15,000 in tax each year, and so it is difficult to make an appeal going all the way to trial in the Tax Court of Canada cost-effective. As such, employees should strongly consider consulting with a Canadian tax lawyer as soon as they are reassessed, or early on in the Tax Court Process. Another challenge is that tax preparers and accountants also spend most of their time on businesses and don’t know the details of employment expense issues quite as well, and so non-specialist accountants may not be well-equipped to handle objections.
However, just because employees fighting the CRA face these challenges doesn’t mean there aren’t any benefits to filing a Tax Court of Canada appeal. The Canadian government—both the CRA and its lawyers from the Department of Justice—are busy. In our experience, this means they are amenable to strike a deal. The modest amounts in issue also mean that employment expenses are almost always addressed under the Tax Court’s informal procedure, which provides a more cost-effective procedure.
If you can get past the initial barriers to claiming employment expenses, you may be well positioned to hammer out the numbers if you know what to look for. Once you’re talking about, for example, a “reasonable” mileage for travel expenses, the government may be willing to give a lot of ground so that its employees can deal with more pressing issues.
Employment Expense Objections and Appeals with Kalfa Law
Kalfa Law’s tax lawyers can help you fight denied employment expenses. Because employment expenses can be black-and-white, you need someone who can quickly tell you what you can and cannot fight for, before you pour time and money into a dispute with the CRA. Kalfa Law’s tax lawyers also conduct a cost-benefit analysis at the initial stages. Here we are able to tell you the likelihood of success on disputing certain expenses against the tax benefit you stand to claim. Here you can assess whether hiring a tax lawyer is in your favour or whether you would spend more money on legal fees than what you stand to gain.
If you have represented yourself so far, or are working with a representative who is in unfamiliar territory, we know how to efficiently review your claim for expenses, the reason the CRA contests them, and advise you on whether you should continue the fight through a Notice of Objection or appeal to the Tax Court of Canada.
If you have opportunities to win back some of your expenses, Kalfa Law can guide you through this process and draft these objections and appeals. We will vigorously argue for the allowance of the claims for which you are entitled and if need be, negotiate with the CRA and their lawyers.
Contact Kalfa Law today for a free consultation with a tax lawyer to discuss denied employment expenses.
-James Alvarez, BA, JD
James Alvarez is a tax lawyer working for the tax law group of Kalfa Law.
© Kalfa Law 2019