Tax Court Confirms CRA’s Policy on Employees’ Employees
A recent Tax Court of Canada decision confirms a longstanding CRA policy—that employees can only claim expenses for an assistant or substitute if they pay that assistant or substitute as their own employee.
In the Legace decision, an employee who earned a salary for overseeing the Canadian arm of an American manufacturing company paid her husband to act as her assistant. She classified her husband as an independent contractor, and he declared income from this role as income from a business.
As we have discussed previously, employees face much more restrictive conditions than business-people in claiming expenses against their income.
CRA’s policy, as expressed here, requires assistants of taxpayers to be employees of another employee for payments to them to be deductible from salary. This is an entirely reasonable reading of the provision allowing employees to claim expenses for assistants or substitutes, as paragraph 8(1)(i) refers to salaries, rather than fees. However, it is certain to cause administrative headaches, as employees would be required to register for a payroll account and remit income tax withholdings, along with CPP and EI premiums, to the government. As people claiming this deduction by definition do not run businesses, they are unlikely to have ready access to a bookkeeper or payroll administrator who can assist with keeping up with the payroll account.
In this decision, the Court confirmed the CRA’s policy, denying the taxpayer her claim for the payments to her husband. Interestingly, this is either the first or one of very few instances of the Court explicitly interpreting this paragraph in this way.
It is worthy to note that this condition does not apply to employees paid on a commission basis, who can claim fees from assistants as expenses against their commissions.
In this case, the taxpayer faced a number of issues with her expenses, including claiming an excessive $75-an-hour rate for her husband’s services. Taxpayers should be cautious about setting salaries and rates for their family member-employees along reasonable lines, as the CRA is likely to scrutinize these payments. Non-arms length salaries must always be commercially reasonable – being equal to what you would pay an independent and unrelated person for similar work.
– James Alvarez, Tax Counsel
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