The CRA has a new ‘project’ underway. This time the target is employees who deduct employment expenses under section 8 of the Income Tax Act. The CRA seems to be on the lookout for employees who are also shareholders of the corporate employer. The impetus for this scrutiny appears to be Adler v R, 2009 TCC 613 (informal procedure). The taxpayer was an employee of a corporation of which he was also the sole shareholder, director and officer. The taxpayer had deducted employment expenses under section 8. Was he entitled to deduct the expenses? At ¶22 of his judgment, Justice Webb (as he then was) wrote:
[I]t seems to me that in order for the Appellant to satisfy the requirement that he was required to pay for the expenditures that were incurred the Appellant would have to establish that there would be some consequences that would be detrimental to the Appellant if he failed to fulfill the obligation. In this particular case, what consequences would arise if the Appellant refused to incur the expenditures? Since the Appellant was the sole officer, director and shareholder of his employer it seems obvious that if the Appellant were to refuse to incur the expenditures that there would be no adverse consequences for him. One cannot imagine the Appellant, as President of Island Ink-Jet Manitoba Ltd., seeking to have the company sue the Appellant for breach of contract, taking any disciplinary action, or writing a poor performance review of the Appellant. Therefore, it seems to me that he chose to pay these amounts personally rather than have the company pay for these expenditures (either directly or by reimbursing the Appellant) and that the Appellant was not required to do so as an employee. There would be no consequences detrimental to the Appellant, if he did not personally pay the expenses or carry out the duties.
On the basis of the foregoing reasoning the Court dismissed the taxpayer’s appeal.
Update 2018 01 13 From the CRA website:
The Canada Revenue Agency (CRA) announced that David Gnanaratnam of Toronto, Ontario, was sentenced November 30, 2017 in the Ontario Court of Justice in Toronto to a conditional sentence of six months and a court imposed fine of $30,000. Mr. Gnanaratnam had previously pleaded guilty on November 23, 2017, to one count of evading income tax under the Income Tax Act.
A CRA investigation revealed that in the course of operating a tax preparation business, Mr. Gnanaratnam claimed false employment expenses on the personal tax returns of 24 of his clients for the 2013 tax year. As a result, Mr. Gnanaratnam wilfully evaded or attempted to evade payment of taxes by his clients totalling $36,035.