In Canada, a significant portion of the workforce operates on a commissioned basis, where their earnings are based on sales or other performance-related metrics.
Commissioned employees play a crucial role in various industries, including sales, real estate, and financial services. However, the taxation and handling of expenses for these individuals can be more complex compared to salaried employees.
Today, we’ll look at key aspects of employee expenses for commissioned employees in Canada, providing insights into allowable deductions and taxation.
Understanding Commissioned Employees
Commissioned employees are individuals who receive a commission or a percentage of the revenue generated from their sales or services.
Unlike salaried employees, who receive a regular fixed wage, commissioned employees' earnings fluctuate based on their performance. These individuals often have more control over their income potential, as their success is directly tied to their sales or output.
If you want to claim expenses as a commissioned employee, you must meet all of the following criteria, as laid out by the CRA:
- Under your contract of employment, you had to pay your own expenses.
- You were normally required to work away from your employer's place of business.
- You were paid in whole or in part by commissions or similar amounts. These payments were based on the volume of sales made or the contracts negotiated.
- You did not receive a non-taxable allowance for travelling expenses. Generally, an allowance is non-taxable as long as it is a reasonable amount. For example, an allowance for the use of a motor vehicle is usually non-taxable when it is based solely on a reasonable per-kilometre rate.
- You keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.
Commonly Deductible Expenses
There are several different expenses that commissioned employees can claim in Canada.
Travel Expenses: This includes expenses related to business travel, such as airfare, accommodation, meals, and car rentals. The CRA sets specific guidelines on what constitutes valid travel expenses.
Home Office Expenses: If commissioned employees use a portion of their home exclusively for business purposes, they may claim deductions for a portion of rent, utilities, and other home-related expenses.
Automobile Costs: Deductions can be claimed for expenses related to using a personal vehicle for business purposes, such as fuel, maintenance, insurance, registration fees, and parking. It also includes interest related to financing, as well as leasing costs. It’s imperative that you keep a driving log if you wish to claim these expenses.
Entertainment Expenses: A portion of entertainment expenses, like taking clients out for meals or events, may be deductible under specific conditions.
Professional Development: Expenses related to attending conferences, workshops, or courses that enhance job-related skills may be eligible for deduction.
Advertising and Promotion: Costs associated with advertising, marketing materials, and promotional activities can be claimed. This also includes promotional gifts and business cards.
Office Expenses: You can claim a deduction on expenses incurred to purchase office supplies like stamps, envelopes, and paper, as well as equipment like printers and computers.
Professional Fees: You can claim reasonable professional expenses such as those incurred to have an accountant complete and file your income tax return. You can also claim certain legal fees.
It's essential to note that the expenses must be directly related to the employee's work and incurred for the purpose of earning income.
Limitations on Deductible Expenses
While there are many expenses that commissioned employees can claim, some limitations and conditions exist:
Reasonableness: The CRA requires that all expenses claimed be reasonable in relation to the level of income earned and the nature of the business.
Employer's Confirmation: The employer must certify the expenses claimed are valid and comply with the company's policies.
Capital Expenses: Certain expenses, such as equipment purchases or improvements, are considered capital expenses and are subject to different tax treatment.
Meals and Entertainment: Deductions for meals and entertainment expenses are generally limited to 50% of the total cost.
Automobile Deduction Limits: The CRA sets limits on the deduction of automobile expenses based on the vehicle's capital cost and the distance driven for business purposes.
Compliance and Record-Keeping-
Maintaining accurate and detailed records of all business-related expenses is crucial for commissioned employees.
Proper record-keeping helps substantiate the deductions claimed and ensures compliance with CRA regulations. Receipts, invoices, and documentation must be retained for a minimum of six years in case of an audit.
Tax Deductions For Commissioned Employees
Commissioned employees in Canada have the opportunity to reduce their taxable income by claiming legitimate business expenses.
Understanding the rules and limitations surrounding deductible expenses is vital to avoid compliance issues with the CRA. To navigate this aspect successfully, commissioned employees are encouraged to seek advice from tax professionals or utilize tax software designed to cater to the needs of self-employed individuals. By doing so, they can maximize their deductions while staying compliant with Canadian tax laws.
Need help? Speak to the Koroll & Company team of chartered professional accountants today.
