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Employment Deduction Expense

Employment Expense Deduction_Self Employed

CRA has conducted many employment deduction reviews in the last few years. According to a recent CRA seminar, two-thirds of reviews were due to incorrect application of T2200 information. It means that CRA thinks practitioners have not been properly applying T2200 information, other than in challenging grey areas of tax law.

T2200 and T777 on individual tax

There’s a lot of confusion around whether or not individual taxpayers can claim employment expenses, and the simple answer is that they cannot — unless they are issued a T2200 Declaration Conditions of Employment. If you claim employment expense without T2200, your claim will be disallowed, and your return will be reassessed.

However, T2200 is not the license to deduct every possible employment-related expense. The T2200 is just a guide to what taxpayers can deduct on their tax returns. As a practitioner, you need to look at the tax form T2200 – Employment Conditions and T4 – Benefits and the other income box 40 to understand how they are linked. It is not uncommon for taxpayers to be issued a T2200 and then discover that they cannot claim any deductions on their T777.

To claim employment expense, the T2200 must be filled out by the employer properly. The taxpayer’s job duties and expenses need to align with what the T2200 indicates as allowable deductions. Taxpayers can only deduct employment expenses that are specified on T2200. The Canada Revenue Agency will go through T2200 and compare it with the taxpayer’s T777 claim. For example, if vehicle expenses are deducted in T777, the T2200 should show that the employee must use his vehicle to perform his job duties.

Vehicle expense

Example 1

Megan was issued a T2200, which indicated she had to use her vehicle to travel between different business locations of the employer. She will be reimbursed a fixed amount of 6000 CAD for vehicle expenses. The 6000 reimbursements have been included in Box 40 of T4. In this case, Megan should be able to deduct the work portion of vehicle expenses because she pays taxes for vehicle reimbursement. We could deduct the employment portion of vehicle expenses for her, such as insurance, repair and maintenance, gas, leasing costs and CCA. She received a taxable allowance, so she is eligible to deduct employment expenses in T777.

Example 2,

Same as example 1, except her business used vehicle was reimbursed by mileage rate prescribed by CRA. In this case, she received 5200 for 10000 business mileage. As the mileage rate reimbursement is lower than actual vehicle expenses and is tax-free benefits,  the 5200 CAD reimbursement will not be included on box 40 and box 14 of T4. As Megan does not need to pay tax for mileage reimbursement, she cannot claim vehicle expenses on T777. What happens if Megan incurs more vehicle expenses than the reimbursement amount? For example, she incurs 7200 work-related vehicle expenses. We can deduct 7200-5200=2000 on T777 as a vehicle expense.

Travel kilometres from home office to business office

The employee works primarily at home but must go to the business office for a meeting and report work. Normally home to job mileage is personal and not deductible for business owners. A similar situation arises when employees working from home can’t claim business mileage for drives between their home and business offices. If the employee has been reimbursed for kilometres, it is a taxable benefit and should be included in T4 box 40 and box 14.

What if the employee performs more than 50% of work at home? In this case, the home office can be considered a “place of business,” and the mileage from a home office is business mileage. Suppose the employee is reimbursed by milage rate. In that case, it is a tax-free benefit and does not need to be reported on T4. The employee can claim the difference as an employment expense if the actual vehicle expense is more than the mileage reimbursement.

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