Tom Williams – Has His Cake & Eats it Too : 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!
Follow the link to the new Canada Revenue Agency Story of the Week index!
http://groups.google.com/group/can.taxes/browse_thread/thread/0423e5e9d997c87f/7586401d55b15b1a#7586401d55b15b1a
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Alan Baggett
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.
-----------------------------------------------------------------------------------------------------
Miss a Tax Tale Miss a lot!
Follow the link to the new Canada Revenue Agency Story of the Week index!
http://groups.google.com/group/can.taxes/browse_thread/thread/0423e5e9d997c87f/7586401d55b15b1a#7586401d55b15b1a
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Alan Baggett