An Unfair Way to Earn an Untaxed Income? : CRA SOTW
Well, this is one of those strange Tax Tales clearly illustrating that
truth is strange than fiction. Fortunately the Tax Court of Canada
back up all their decisions in writing so the non-believers can easily
do a little search to independently verify this week’s story.
If any Canadian wants to set up a sweet tax deal than take some notes
from Tom Williams!
Tom Williams was employed by Whelan, Beliveau as a Technology Analyst.
He was hired to help the brokerage firm develop and sell high-tech
securities offerings. Williams would earn one-quarter of any gross
commissions the firm earned from these deals but he had to pay his own
expenses, such as travel and the cost of an assistant. He had no
written employment agreement. Instead, had a verbal agreement whereby
he would receive a commission based on the business he brought into
Whelan, Beliveau. Because he had no current income Tom was permitted
to take monthly draws against his anticipated earnings. All draws and
advances were treated as employment income.
Mr. Williams job required him to travel and HE was responsible for
these expenses. The expenses incurred were a necessary part of the
job. He was not entitled to be reimbursed for these expenses BUT his
employer paid them and treated them as a debt owing. I.e. they would
be repaid when he started to generate an income (from future
commissions).
However, as it turned out, Mr. Williams completed no business for the
company and so earned no commissions. When he left Whelan, Beliveau in
1998 he owed them for the advances taken against his expected
commissions as well as for the expenses.
When he filed his tax returns Mr. Williams included the advances as
income and claimed his expenses as deductions. Which sounds strange
because, as was clearly stated, the expenses incurred by him were not
paid by him but his employer. Though he was expected to reimburse his
employer for these expenses at a future date.
The Minister reassessed the returns and denied the deduction of the
expenses.
On appeal the claim for expenses was quickly denied and the case ended
up in the Tax Court of Canada as Williams v. the Queen.

The Canada Revenue Agency’s argument was that Williams was not
entitled to the deductions because he did not repay the amounts his
employer advanced him.

However, the ITA states clearly that a taxpayer is allowed to deduct
all reasonable amounts for travelling during the course of employment
as long as the amount expended was incurred to carry on employment
duties away from the employer’s place of business. As well, the
employee must not receive an allowance for the expenditures, can not
claim a deduction under certain other provisions AND the employee is
required to repay the amounts. As well there can be no requirement for
the taxpayer to incur the expenses.

Mr. Williams met all the conditions.

So, to cut to the chase, as long as you have a real and immediate
expense liability that was properly incurred, the costs are deductible
even though you may not have paid them! (also see Nissim v. the
Queen).

In this instance (Williams), each time the employee generated the
expense it was the employee’s money being spent. Not the employer’s.
So even though Williams had not paid the expenses a liability was
created with the employer with the expectation that the expenses would
be repaid in the future. A liability existed in Mr. Williams’s name
for repayment of the expenses.

And the pure numbers?

In 1997 Williams earned $141,500. And in 1998 he earned $165,960.

In expenses he racked up, respectively, $76,864 and $75,029.

So when you add it all up Mr. Williams was paid (notice I did not say
earned) $307,460 for the two years and generated $151,893 in expenses.
The expenses were not paid by him but were claimed by him which
reduced his taxable income for the two years to $155,567 or $64,636
and $90,931 respectively. Which is a sweet sweet tax savings.

It’s like having your cake and eating it too.

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Miss a Tax Tale Miss a lot!
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Alan Baggett – Tax Collector’s Bible