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Car Salesmen Can Deduct Some Business Expenses from Income

The Income Tax Act requires that, in order for a taxpayer to deduct expenses from their employment income, the taxpayer must be required to incur those expenses under their employment contract. In Urquhart R. v. The Queen, the Federal Court of Appeal considered the unique case of a car salesman, who earned a fixed salary in his role as sales manager, but incurred costs in order to earn commissions as a sales associate at the dealership.

In the Tax Court of Canada decision, the Judge had denied the taxpayer the deductions claimed on his return. After reviewing the contract, the Judge was not satisfied that the expenses the taxpayer had incurred in the course of his employment were required to be covered by the taxpayer in the employment contract.

On appeal, the FCA took a different approach to interpreting the contract. The Court reviewed the contract, not just from the perspective of the employer, but from an objective standpoint. It was apparent that in order to earn sales and commissions as contemplated by the contract, certain expenses were implicitly required to be paid by the taxpayer.

The FCA segregated the types of costs, for instance, costs related to developing and marketing of sales (i.e., postage stamps for cards sent out to customers) were not required under the contract. However, expenses that, on an objective review of the contract, were directly required for the appellant to fulfill his responsibilities and obtain his entitlements under the contract and were expressly agreed to with the dealership were required expenses under the contract. Specifically, the Court identified the deductible costs as those relating to the following:

  1. Freight and transportation costs to bring cars to the dealership to deliver to customers, and
  2. The cost of purchasing accessories to be included on delivery of a vehicle, or shortly thereafter and which the Taxpayer and dealership had agreed to share (charge back).

If you are employed in a sales capacity, and would like more information on your ability to deduct various expenses, or need assistance dealing with an income tax assessment, please contact myself, or my associates Keith Trussler and Linda Smits.