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Do You Understand 'Employment Expenses' on Your Tax Return?

01/09/2015 06:03 EST | Updated 03/11/2015 05:59 EDT

More than three quarters of Canadians whose claims for employment expenses were reviewed by the CRA were reassessed so know what qualifies before you file

Employment expenses are possibly the most misunderstood deductions on your tax return. It's the most commonly adjusted on reviews by the Canada Revenue Agency (CRA). In the most recently released statistics, more than three quarters of taxpayers whose claims for employment expenses were reviewed were adjusted by the CRA, and while some were likely the result of not having the paperwork to back up the claim, some were simply mistaking what you can claim as an employment expense and what you can't.

You may have expenses you incur to do your job. And some of my clients make a very good argument for why they believe they should be able to claim certain expenses. But the rules around employment expenses are fairly strict. If you're a salaried employee, receipts alone aren't enough. If your employer requires you to make certain purchases, you can't claim the expenses unless a) this is stipulated in your job contract, b) the expenses are allowed under the Income Tax Act and c) the company agrees to issue you a T2200 Form--Declaration of Terms of Employment--to show that the necessary conditions have been met.

Often, employers won't supply a T2200 for expenses like boots, hardhats, uniforms, or special clothing. They're not required to by law, and most often, they're right--the expenses aren't deductible on your tax return. The CRA won't intervene to force your employer to issue a T2200 and the form must be signed by your employer to qualify. Reasonable allowances from your employer for uniforms or cleaning expenses are considered a reimbursement, rather than a taxable benefit.

GREY AREAS

Many other employment expenses fall into a grey area. For example, you can't claim your cell phone's connection and licensing fees, but you can claim the cost of airtime required to do your job. You can't claim all of your airtime unless you can prove it is never used for personal purposes. If you have two cell phones--one exclusively for work, one for personal purposes--you can claim the full amount of the work phone. But you still need a signed T2200 and paying cell phone expenses must be outlined in your job contract.

Likewise, your home office can't be claimed as a work expense without a T2200 confirming that you work from home. The amount you can claim depends not just on the square footage your home office takes up but also the amount of time in any given week you spend working from home. Devote a room to it; working at the kitchen table doesn't count.

Often, new tradespeople try to claim all of the cost of their tools on their returns. Unfortunately, they can only claim a maximum of $500. An itemized list from the employer specifying that the tools were necessary to do the job is required.

AUTOMOBILE EXPENSES

The waters are a little clearer when it comes to automobile expenses, but no less paperwork-intensive. If you are required to use your car for work, you'll have to keep an accurate log of how much of your mileage is work-related, and how much isn't, in order to claim a percentage of your car expenses. Work-related travel begins at work; commuting to and from work, even if you're called in for an emergency situation, or you're a construction worker whose destination varies from job to job, doesn't qualify as a work expense.

After you have kept an accurate log breaking down work-versus-personal travel for several years, the CRA will scrutinize you less, as long as the pattern you've demonstrated doesn't vary by more than a few per cent; if it increases, make sure you're logging your kilometers accurately.

Here's some good news, finally. There's a wide variety of auto expenses you can claim: license and registration fees; fuel costs; insurance; interest on money borrowed to buy a vehicle and leasing costs, to a limited extent; and maintenance and repairs. However, parking and speeding tickets can't be claimed, even in the event of an emergency.

ON COMMISSION

Workers who are paid wholly or partly on commission have more leeway than salaried employees, if they meet certain conditions: you're required to pay your own expenses, you normally don't work from the office, you don't get a non-taxable allowance for travel expenses (for example, vehicle use on a per-kilometre rate), and, of course, having these conditions spelled out on a T2200. There's a broader range of employment expenses available to commission employees: accounting fees, promotions, entertainment expenses, bonding fees and more so claim all the relevant expenses you can.

There are a wild variety of employment expense claims that tax-filers make. Dry cleaning and teeth-whitening for on-air performers? Doesn't fly. My favourite may be the repairman whose employer demanded a bi-weekly haircut. He took his case to Tax Court, and lost. But it definitely showed determination.

The reality is, though, that if you're receiving a T4 slip from an employer, most of your work-related expenses aren't eligible to be claimed. And if you can claim employment expenses, you need both the T2200 Form and all of your receipts to get your full amount. It is much better to be in the quarter of returns claiming employment expenses that were not reassessed.

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