Tag: Deduction

Deductibility ‘up in the air’ – A commuting pilot’s predicament

As I was just this morning discussing with a colleague, commuting can be logistically cumbersome, not to mention time-consuming.  In my case, it’s 3 to 4 vehicle transfers depending on direction and departure time.  As importantly, commuting costs can be, well … costly.  

So if those costs can be characterized in such a way as to be deductible, that could alleviate some of that burden.  For Ian Brown, a pilot with 2,500 kilometres from home in Calgary to his home base tarmac in Los Angeles, that would be welcome relief indeed to the tune of over $16,000 for the two years in issue.

The long commute

Mr. Brown was a captain with Cathay Pacific Airways, most often flying the route between Los Angeles and Hong Kong.  In order for him to have lived in Los Angeles, he would have required employer sponsorship to qualify for a United States Green Card or alternatively a visa under the Diversity Visa Program.  At the time, Cathy Pacific did not provide such sponsorship.

The airline did have home bases in Vancouver and Toronto, but Mr. Brown did not have sufficient seniority to qualify to work out of either of those locations.  Presumably he would have been willing and able to move domestically to the designated location if he had qualified.

As it was, Mr. Brown traveled to Los Angeles, conceding to the judge in the course of this informal procedure at the Tax Court that these were commuting costs in order for him to get to his place of employment.

Deductibility of travel expenses

Section 8(1)(h) of the Income Tax Act allows for the deductibility of travel expenses where an employee:

  • was ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in different places, and 
  • was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment.

The cost of getting to and from work is not deductible.  

In search of an exception

The judge considered whether the immigration restrictions might provide Mr. Brown with an exception to the commuting rule.  His contention was that he had no choice but to live in Canada.  While acknowledging the predicament, the judge nonetheless found that it remained a personal choice, and further that as he performed no employment duties during the course of the commute, this avenue was not available to him.

Mr. Brown’s last chance was to ask the court to follow an earlier judgment of the Tax Court that allowed a pilot in a similar situation to deduct travel costs to reach a home base destination outside of Canada.  

Unlike informal procedure hearings (such as the one being presently heard), the referenced case was conducted under the general procedure, and therefore had potential precedent value.  Unfortunately the reported case was simply a consent judgment endorsing an agreement reached between the taxpayer and the prosecuting Crown counsel.  Without the opportunity to review any judicial analysis nor even to have the benefit of an explanation of the Crown’s rationale for the consent, the judge was unwilling to allow Mr. Brown’s appeal.

Have your cake and write it off – A Pink Elephant in the room

During the early years of my career, I worked in the educational conference field — initially in not-for-profit academia, and later in the very competitive one-day commercial conference segment — delivering tax, insurance and investment content to professionals.

Despite largely successful conferences, for every star session there was at least a dog or two that drained the coffers. Accordingly, pricing strategy, provision of sustenance, and inclusion of swag were recurring themes at management meetings.

Much of this came back to me while reading a recent tax appeal of a CRA reassessment denying deductibility of certain catering expenses.

Ordinary course of business

The idiom of there being an elephant in the room is a reference to an obvious truth not acknowledged by those who can plainly see it is there. This apparently was the CRA’s perspective in denying half the catering expense deductions claimed by Pink Elephant, a provider of information technology training seminars.

Pink Elephant charged an all-inclusive fee to attendees — ranging from $2,000 to $10,000 — for courses that ran from two to 13 days. These public educational courses were provided in hotels, with breakfast and lunch served.

Under the Income Tax Act, a taxpayer is entitled to deduct reasonable expenses in arriving at taxable income. In the case of food, beverage and entertainment expenses, the general rule is: half of the outlay is deductible. Pink Elephant claimed entitlement to the exception to this limitation, seeking full deduction of these types of expenses when incurred within its ordinary course of business.

In interpreting the term “ordinary course of business,” the Judge considered the positions of a hotel and restaurant operation as compared to a restaurant operation alone. In the Judge’s opinion — the only one that counts in court — it would not make sense to apply the limitation to the former, and yet allow the exception for the latter. Furthermore, this treatment applies, “whether the provision of food or beverages is a minor or significant part of the ordinary course of business” of the taxpayer.

Pink Elephant got its full deduction.

Half measures

From the conference attendee perspective, in the absence of a detailed cost breakdown, there is a deemed $50 per day for food and beverages, to which the 50% limitation would apply.

Interestingly (and this received brief mention in the case), a later section of the Act treats amounts paid for travel on an airplane as not being in the same class as expenses incurred on food, beverages or entertainment. Given the now-standard practice of unbundling meals from airfares (at least for the class of cabin that I frequent), it would appear the 50% limitation might again apply to the in-flight sandwich purchased using my credit card — though I didn’t find any cases or rulings that either confirm or refute that treatment.

Deducting moving expenses

At issue    

Generally, moving expenses are personal in nature, and therefore not deductible in calculating one’s tax bill.  

As an exception to this general rule, where a taxpayer moves to a new residence for the purpose of carrying on a business or to be employed in a new work location, related moving expenses may be deductible.  In order to qualify for the deduction, the taxpayer must move a minimum of 40 kilometres closer to the work location.  

This is one rule where it is worth exploring how the rule can apply in circumstances where its availability is not so obvious.

Wunderlich v. R., 2011 TCC 539

The taxpayer began working for his employer in 2004.  After accepting a promotion in 2007, he decided that he could more effectively carry out the new job function by moving closer to that same workplace where he had been located from the beginning.  The move occurred in 2008.

On reassessment, CRA accepted that the 50 km distance and the nature of the expenses fit within the rules, but denied deductibility on the basis that it was not a “new work location.”

The judge determined that the definition of “eligible relocation’ did not require that the move occur immediately on commencing employment, and that notwithstanding the four year interval, the taxpayer would be entitled to the claimed $33,160 deduction.

2011-0394741E5 (E) – Moving Expenses – Expanded Sales Territory

The facts in this CRA inquiry describe a taxpayer who began employment as a part-time retail sales merchandiser in 2001.  Her role and responsibilities changed and expanded periodically, eventually becoming full-time by 2007.  

With the addition of new territorial responsibility in 2008, she was traveling as much as 120 km and 2 hours to reach the perimeter of her territory.  Roughly at the same time, the employer was acquired by another corporation.  Owing to concerns with job security, she decided not to make an immediate move, but did move 100 km in 2010.

The CRA representative acknowledged the connection between the 2008 territorial expansion and the 2010 move.  Furthermore, it was accepted that the expansion of a sales territory sufficed to result in a “new work location”, and therefore any qualified expenses would be deductible.

2005-0138461E5 (E) – Moving Expenses – Self-Employed Individual

The taxpayer moved from rental accommodation to a purchased residence, part of which was devoted to a new home-office.  In CRA’s view, the reason for the taxpayer’s relocation must be to carry on a business at the new work location.  For clarity, that means that a move to a new residence for personal reasons will not be an “eligible relocation” simply because the taxpayer’s business accompanies the taxpayer and becomes housed at that new location. 

Where however the relocation fulfills a business reason such as being closer to a potential new market or to suppliers or specialized equipment, the deductibility requirements may indeed be satisfied.  

Practice points

  1. A move need not occur concurrently with the employment change, but to the extent that there is a delay then there must still be a provable nexus between the two events.
  2. For employees with field responsibility, there is some latitude for defining a new work location by reference points rather than strictly as a point in space.
  3. For a relocated self-employed taxpayer, the business aspect must be a “reason” and not merely a result of a personal motivation.