Tag: Self-employed

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.

At issue

It would perhaps be more apt to entitle this article “non-” deductibility of business clothing expenses, as fairly narrow qualification rules apply to such claims.  Particularly in the circumstance of an independent financial advisor, a successful claim may be a remote possibility.

Still, it is not entirely outside the realm of possibility, and it can be instructive for one’s future reference to have an appreciation of the nature of claims that fail to qualify.

With fingers crossed then, here are some taxpayers who sought to deduct clothing costs, including one that got a little more exposure than may have been desired.

Rupprecht v. The Queen, 2007 TCC 191

Advisor had expended considerable cost building and furnishing an office in the Vancouver suburb of Langley.  He testified that he needed suitable clothing to go with the office, claiming over $8,400 through the 1999 and 2000 taxation years for purchases from “Ermengildo Zegna, an exclusive men’s wear shop,” as described by the judge.  In support of his position, the advisor even included a letter from a store sales associate.

As the clothing did not fall under claims for uniforms and such, its deductibility would need to rest on being a general business expense, which in turn required the judge to consider the converse condition of what constitutes a personal expense.  In denying the claim, the judge held that “expenses relating to one’s personal appearance are the very essence of a personal expense” for which the cost is not deductible.

Rioux v. The Queen, 2007 TCC 82

Advisor sought to deduct just over $2,000 for clothing expenses in each of the 2001 and 2002 taxation years.  The claims were based in part on advisor’s argument that he was self-employed, despite his commissions being characterized as employment income on his T4 slip from Canaccord Capital Corporation, and he having likewise disclosed those commissions as employment income in reporting his income in those years.

On appeal, the advisor produced an agreement from 1994 purporting to show a self-employment relationship with the predecessor company that was acquired by Canaccord in 1999.  The advisor alleged that Canaccord was bound by the former agreement, but provided no proof of this assertion, and therefore he failed to satisfy the threshold requirement of being self-employed for the judge to even consider the claimed deduction.    

Hamper v. Commissioner of Internal Revenue (United States Tax Court Summary Opinion 2011-17)

While lacking precedent value in Canada, cases from other jurisdictions can be illuminating.  

In what has infamously become known as the “thong deduction” case, an Ohio television anchorwoman sought to claim various items of clothing allegedly necessary to perform her job duties.  In deciding whether an item should be claimed as a deductible business expense, she asked herself “would I be buying this if I didn’t have to wear this” to work.  She proposed ‘yes’.  The judge replied ‘no’.

Practice points

1. The cost of uniforms and other clothing consumed in the workplace may be deductible.
2. As is mentioned in almost all the cases, clothing is prima facie a personal expense, and it is the taxpayer’s onus to prove otherwise. 
3. Undergarments?  Hard to imagine, and harder to explain to your clients if you’re later exposed on the evening news.