When is an Amount Paid in Order to Be a Deduction?
Volume No. 05-29
“Can a taxpayer deduct an amount he didn’t pay directly?.”
In the case of Williams (2004 DTC 3549), the Tax Court had to determine whether an amount had been “expended by the taxpayer”, when the taxpayer did not actually pay the expenses in question.
The taxpayer was to be paid commission following the successful offering of securities ofhigh-tech firms. It was agreed that the brokerage firm, by whom the taxpayer was employed, would pay draws (which were treated as employment income by the individual) as advances against his future commissions. To carry out the necessary work, the taxpayer had to travel extensively and had to hire an assistant. In his oral contract, there was no explicit mention of the requirement to hire an assistant.
Unfortunately, the taxpayer never earned commission, as the deals never closed. The taxpayer left the brokerage firm and never repaid the advances. The advances included the amounts paid to the assistant. In the taxpayer’s tax returns during this period, he reported advances as income and deducted the expenses related to travel and to his assistant, totalling over $150,000. The CRA claimed that he was not entitled to deduct the expenses for two reasons:
- There was nothing in his (oral) contract that said he had to pay for an assistant;
- He never actually paid the amount to the assistant. The brokerage firm made the payments to his assistant on his behalf.
If the CRA’s assessment was upheld, the payments to his assistant would not be deductible to anyone because the brokerage firm had reported the amounts as a loan. The result would have been that payments for travel and other expenses as well as the assistant’s salary would never have been deducted. The Court ensured the equitable result by holding that the amounts were deductible by the taxpayer.
This is another example of the CRA not being concerned with the overall picture, but merely looking at the narrow facts. In the CRA’s opinion, the amount was not expended by the taxpayer and was therefore not deductible. The CRA was not concerned with whether anyone would deduct the expenses. Be aware that the CRA will often look at the facts and make a determination without looking at the big picture as to whether or not it is an equitable result.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
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