TaxMatters@EY – March 2023

Alan Roth, Toronto

As the 2022 personal income tax return (T1 return) filing deadline quickly approaches, it’s time to reflect on the year that ended and complete your T1 return. That means it’s also time for EY’s annual list of tax filing tips and reminders that may save you time and money.

For tips and reminders on certain tax deductions and credits, see “Spotlight on personal tax deductions and credits that may be claimed on your 2022 T1 return” in this issue.

Personal tax filing tips for 2022 T1 returns

No matter what, file on time: Generally, your T1 return must be filed on or before April 30. If you, or your spouse or common-law partner, are self-employed, your return deadline is June 15, but any taxes owing must be paid by the April 30 deadline. Since April 30 falls on a Sunday in 2023, the 2022 T1 return filing and tax payment deadlines are extended to Monday, May 1, 2023.

Failure to file a T1 return on time can result in penalties and interest charges. Even if you are not able to pay your balance by the deadline, you should still file your T1 return on time to avoid penalties. And even if you expect a refund, you should still file on time in case a future change or assessment results in a tax liability for the year. Filing on time also ensures you receive any benefit or credit entitlements (such as the Canada Child Benefit or GST/HST credit) in a timely manner. Remember, if you wait more than three years after the end of the year to file a T1 return claiming a refund, your right to the refund expires and will be subject to the Canada Revenue Agency’s (CRA’s) discretion.¹

Review your 2021 T1 return: Reviewing your 2021 T1 return and notice of assessment or reassessment is a great starting point before you complete and file your return. Determine if you have any carryforward balances that may be used as deductions or credits in your 2022 T1 return.

Carryforward amounts could include unused registered retirement savings plan (RRSP) contributions, unused tuition, education and textbook amounts,² interest on student loans, capital losses or other losses of prior years, resource pool balances and investment tax credits.

COVID-19 benefit payments: Payments received in 2022 from various federal, provincial and territorial COVID-19 support programs are taxable and must be reported on Line 13000 of your 2022 T1 return.³ These programs include the Canada Recovery Sickness Benefit (CRSB), Canada Recovery Caregiving Benefit (CRCB) and the Canada Worker Lockdown Benefit (CWLB),⁴ all of which were available until May 7, 2022. The amount of each benefit to include on your 2022 T1 return is reported on Form T4A, Statement of Pension, Retirement, Annuity, and Other Income, copies of which you should have received by the end of February 2023 in respect of the 2022 taxation year.

Repayment of COVID-19 benefits: As discussed in TaxMatters@EY, December 2022, Asking better year-end tax planning questions – part 2, recent amendments allow individuals who repay certain COVID-19 benefits before 2023 to claim a deduction in computing income for the year in which the benefit was received, rather than in the year the repayment was made. If the individual makes the repayment after filing their T1 return reporting the income inclusion, the individual who claimed the deduction will be able to file an adjustment.

For repayments made in 2022 of amounts received in 2020 or 2021, the adjustments can be made by completing and filing Form T1B, Request to Deduct Federal COVID-19 Benefits Repayment in a Prior Year, with your 2022 T1 return. You can also split the deduction between the year you received the benefit and the year it was repaid, as long as the total deduction does not exceed the amount repaid. This may also be done on Form T1B in respect of 2022 repayments.

For example, if you received CRCB payments in 2021, the amount received was required to be included in income on your 2021 T1 return. However, if the CRA later determines that you were not eligible to receive those payments and you repay the amounts in 2022 after filing your 2021 T1 return, you can file Form T1B with your 2022 T1 return and choose on that form to claim all or a portion of the deduction on your 2021 T1 return. The 2021 T1 return will then be automatically reassessed to apply the deduction assigned to the 2021 taxation year. Any amount not assigned to the 2021 taxation year may be deducted on your 2022 T1 return (on Line 23210).

If you received but also repaid federal COVID-19 benefit amounts in 2022, the net amount as shown on your 2022 Form T4A slip (see “COVID-19 benefit payments” above) should be reported on Line 13000 of your 2022 T1 return.

Note that repayments of provincial or territorial COVID-19 benefit program amounts are deducted on Line 23200 of the T1 return.

Home office expenses: In response to the significant number of employees working from home as a result of the COVID-19 pandemic, a temporary flat rate method is available for employees to claim up to $500 for home office expenses on their 2022 T1 return.⁵ Under this method, an employee may deduct $2 for each day they worked from home in 2022 due to the pandemic (up to a maximum of 250 working days) for a maximum deduction of $500. A partial day worked from home counts as a full day for purposes of this calculation. Other conditions apply.⁶ Under this method, home office expenses that are incurred do not need to be tracked or substantiated and the employer is not required to complete and sign any forms. However, the claimant should have information to substantiate the number of days worked from home if asked at a later date by the CRA. This method may be advantageous to employees who do not incur home office expenses that exceed the $2 daily amount, or for those who prefer a simple approach.

Alternatively, the traditional detailed method may be chosen to deduct specific eligible home office expenses incurred in the course of earning employment income. The types of expenses that may be claimed by employees are limited, although the CRA has expanded the list of eligible expenses to include a reasonable portion of internet access fees. Other conditions apply.⁷

To apply the detailed method, the employee must obtain from their employer a completed and signed Form T2200S, Declaration of conditions of employment for working at home due to COVID-19, or Form T2200, Declaration of conditions of employment. If an employee needs to claim other types of employment expenses in addition to home office expenses (e.g., motor vehicle expenses), or if the employee was normally required to work from home under their employment contract, the employer must complete and sign Form T2200.

The computation of the deductible portion of expenses is calculated on Form T777S, Statement of employment expenses for working at home due to COVID-19, if the detailed method is used and the employee is only claiming home office expenses, or if the employee is claiming expenses under the temporary flat rate method. Form T777S also provides the option to carry forward an amount of home office expenses from the previous taxation year. Otherwise, Form T777, Statement of employment expenses, must be used. Either form must be filed with the T1 return.

Tax on split income: The tax on split income rules limit income splitting opportunities with children and certain adult family members for income derived directly or indirectly from a private corporation. Income that is subject to tax on split income is taxed at the highest marginal personal income tax rate and is calculated on Form T1206, Tax on Split Income. For more information on the revised rules, see “Asking better year-end tax planning questions – part 1” in the November 2022 edition of TaxMatters@EY.

Principal residence sale — reporting required, even if all gains are exempt: Capital gains realized on the sale of your residence may be exempt from tax if the residence qualifies as, and is designated as, your principal residence. No tax is owed, for example, if your residence is designated as your principal residence for each year that you owned it. However, you are required to report the disposition of a principal residence on your T1 return, whether the gain is fully sheltered or not.⁸

The sale of your principal residence must be reported, along with the principal residence designation, on Schedule 3, Capital Gains (or Losses), of your T1 return. In addition, you must also complete Form T2091, Designation of a property as a principal residence by an individual (other than a personal trust). The year of acquisition, proceeds of disposition and a description of the property must be included on the form.

If the gain is fully sheltered, you only need to complete the first page of Form T2091 and no gain needs to be reported on Schedule 3. However, the appropriate box (box 1) still needs to be ticked in the principal residence designation section on page 2 of Schedule 3. If the gain is not fully sheltered, then any capital gain remaining after applying any available principal residence exemption (as calculated on Form T2091) must be reported on Schedule 3.

There is generally a time limit for the CRA to reassess a T1 return. The normal reassessment period for an individual taxpayer generally ends three years from the date the CRA issues its initial notice of assessment. However, if you do not report the sale of your principal residence (or any other disposition of real property) in your T1 return for the year in which the sale occurred, the CRA will be able to reassess your return for the real property disposition beyond the normal reassessment period.

T1135 — remember your foreign reporting: If at any time in the year you own certain specified foreign property with a total cost of more than CDN$100,000, you are required to file Form T1135, Foreign Income Verification Statement. This form may be filed electronically. Failure to report foreign property on the required information return may result in a penalty. Failure to file Form T1135 on time may result in a penalty equal to $25 for each day the failure continues, for a maximum of 100 days ($2,500), or $100, whichever amount is greater. More significant penalties may apply if a person knowingly, or under circumstances amounting to gross negligence, fails to file the form. In addition, if Form T1135 is not filed on time or includes incorrect or incomplete information, the CRA can reassess your T1 return for up to three years beyond the normal reassessment period.

Reportable property generally includes amounts in foreign bank accounts and shares or debts of foreign companies, as well as other property situated outside Canada. It does not include property used in an active business, shares or debt of a foreign affiliate or personal-use property.

Capital losses: Capital losses realized in the year may only be applied against capital gains. Net capital losses may be carried back three years, and losses that cannot be carried back can be carried forward indefinitely.

Where capital losses are incurred on certain shares or debt of a small business corporation, they may qualify as business investment losses that may be claimed against any income in the year, not just capital gains.

Pension income splitting: If you received pension income in 2022 that is eligible for the pension income credit, up to half of this income can be reported on your spouse’s or common-law partner’s T1 return.

You’ll reap the greatest benefits when one member of the couple earns significant pension income while the other has little or no income. In some cases, transferring income from a lower-income pension recipient to a higher-income spouse can carry a tax benefit.⁹

Claim all your deductions and credits: Remember to take advantage of the various family-related tax credits that might apply to you. See the “Spotlight on personal tax deductions and credits that may be claimed on the 2022 T1 return” article in this issue of TaxMatters@EY for details.

…or not: You may be able to increase the tax benefit of certain discretionary deductions if you defer them to a later date:

• Discretionary deductions that may be deferred include RRSP contributions and capital cost allowance.
• Similarly, consider accumulating donations over a few years and claiming them all in one year to increase your benefit from the high-rate donation credit which is available for donations made within the five preceding years.
• Deferring deductions and certain credits makes sense if you are unable to use all applicable non-refundable tax credits in 2022 (and they cannot be transferred), or if you expect to earn higher income in the future.

File a T1 return to obtain certain benefits or credits

File T1 returns for children: Although often unnecessary, in many cases there are benefits to filing T1 returns for children. If your children had part-time jobs during the year or have been paid for various small jobs, such as babysitting, snow removal or lawn care, by filing a T1 return they report earned income and thus establish contribution room for purposes of making RRSP contributions in the future.

Another advantage of filing T1 returns for teenagers is the availability of refundable tax credits. Several provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid out to the taxpayer. There is also a GST/HST credit available for low- or no-income individuals over age 18.

File a T1 return to obtain the climate action incentive benefit:¹⁰ This is a tax-free federal benefit with payments made quarterly to eligible individuals 19 years of age or older who are resident in Alberta, Ontario, Manitoba or Saskatchewan on the first day of the payment month and the last day of the previous month. Beginning in July 2023, eligible individuals who are resident in Nova Scotia, Prince Edward Island or Newfoundland and Labrador will also be eligible for this benefit. However, eligible individuals in all these provinces must file their 2022 T1 return to receive these payments in respect of the 2022 taxation year.¹¹ The amount of the benefit varies according to the province of residence, and additional amounts may be claimed for a cohabiting spouse or common-law partner and for any children under the age of 18.

A supplement equal to 10% of the baseline benefit amount may be claimed by checking the box on page 2 of the T1 return by an eligible individual who resides in a small or rural community. If the individual is married or living common-law and they and their spouse or partner were both living in the same small or rural community, the individual and their spouse or partner must both tick the box on their respective T1 returns. The payments will be made to the spouse or partner whose T1 return is assessed first. Residents of Prince Edward Island will automatically be eligible for the supplement and will, therefore, not be required to tick the box on their T1 return.

Tips for business owners

COVID-19 benefit payments: If you operated an unincorporated business in 2022 and received wage or rent subsidies for a qualifying period ending in 2022¹² under the federal Canada Recovery Hiring Program (CRHP), the Tourism and Hospitality Recovery (THRP) or Hardest-Hit Business Recovery (HHBRP) programs, or the local lockdown program, the subsidies are considered to be taxable government assistance and are required to be reported as income on your 2022 T1 return. All these programs were available until May 7, 2022. Other financial assistance benefits received under a provincial or territorial COVID-19 relief program for your business should also be included in income. These benefits are generally reported on Form T2125, Statement of Business or Professional Activities.

Capital cost allowance claims: If you are a self-employed individual earning unincorporated business, professional or rental income, you are entitled to claim capital cost allowance (CCA) on depreciable capital property if the property is available for use to earn such income. You are required to report your business or professional income and deductible expenses on Form T2125, Statement of Business or Professional Activities. Likewise, if you earn income from a rental property, your rental income and deductible expenses are reported on Form T776, Statement of Real Estate Rentals. CCA is claimed on these forms.

The accelerated investment incentive property rules significantly accelerate CCA for most depreciable capital properties until, and including, 2027. Certain properties such as manufacturing and processing machinery and equipment are eligible for full expensing in the year of acquisition, on a temporary basis (up to and including 2023). The accelerated CCA rules apply to eligible property acquired and available for use after November 20, 2018, subject to certain restrictions. New immediate expensing rules also provide for a temporary expansion of assets eligible for full expensing, up to a maximum of $1.5 million per taxation year. These rules apply to certain designated property that is acquired by a Canadian-resident individual after December 31, 2021 and that becomes available for use before January 1, 2025.

Full expensing of zero-emission vehicles is also available under the CCA rules for eligible vehicles that are purchased and become available for use in a business or profession on or after March 19, 2019, and before 2024, subject to certain restrictions such as a cap on the cost of passenger vehicles.¹³

For further details on the availability of accelerated CCA claims or the temporary immediate expensing of certain assets as noted above, see “Asking better year-end tax planning questions – part 2” in the December 2022 edition of TaxMatters@EY, as well as EY Tax Alert 2022 Issue No. 30, EY Tax Alert 2021 Issue No. 24, EY Tax Alert 2019 Issue No. 27, and EY Tax Alert 2018 Issue No. 40.

2023 planning: Consider income splitting opportunities such as paying reasonable salaries to a spouse or child for services provided to your business. Or, if your business is operated through a private corporation, consider income splitting corporate earnings with adult family members, bearing in mind such opportunities are now limited due to the revised tax on split income rules. For further details, see “Asking better year-end tax planning questions – part 1” in the November 2022 edition of TaxMatters@EY.

Take advantage of technology

Use software to prepare your T1 return and file electronically. The CRA offers several online services to make managing your taxes faster and easier.

Registering for the CRA’s My Account will allow you to view prior-year T1 returns and assessments, check carryover amounts, view tax slips filed in your name, view account balances and statements of account, file T1 returns, make payments and track the status of your T1 return. It also allows you to register to receive online correspondence from the CRA within My Account, including notices of assessment, benefit notices and slips, and instalment reminders. My Account will also allow you to use the Auto-fill my return service, which pre-populates your T1 return with figures from tax information slips and other information from CRA records if you are using NETFILE-certified software for preparing your T1 return. As of February 2022, you need to provide the CRA with an e-mail address to access My Account.

The MyCRA mobile app allows you to access and view on your mobile device personalized tax information such as your notice of assessment, T1 return status, benefits and credits, and tax-free savings account (TFSA) and RRSP contribution limits, or make payments from your mobile device. The MyBenefits CRA mobile app allows you to view all your benefit and credit information on your mobile device. For further details, see https://www.canada.ca/en/revenue-agency/services/e-services/cra-mobile-apps.html.

Certain tax preparation software products offer the CRA’s Express NOA service, which can provide you with your notice of assessment immediately after you file your T1 return electronically. You must be registered for both My Account and online correspondence with the CRA to use the Express NOA service.

The CRA’s ReFILE service allows you to file adjustments to your T1 return using NETFILE certified tax preparation software, provided your original T1 return is also filed electronically. Adjustments can be made to your 2021, 2020, 2019, or 2018 T1 return. You should receive your notice of assessment on your original T1 return first before using ReFILE to file any adjustments.

The CRA’s Check CRA Processing Times tool provides you with general processing times for T1 returns and other tax-related requests sent to the CRA.

Make time for tax planning

When your T1 return is done, you can step back and reflect on your progress toward your financial goals in the year that just ended. It’s a great primer for a meaningful conversation about tax and estate planning.

Tax season is a time when many focus a little more closely on their financial affairs. So this really is a good time to at least take a new look at the components of your financial and estate plan that could most impact your financial future and those who depend on you. It is also a great time to think of ways to save on your 2023 taxes. For tax planning tips, see our two part series on “Asking better year-end tax planning questions” in the November 2022 and December 2022 editions of TaxMatters@EY.

Get a head start on 2023 savings

Early in 2023 is a great time to think of ways to save on your 2023 taxes. Here are a few tips to help you increase your savings:

• Contribute early to RRSPs or registered education savings plans (RESPs) to increase tax-deferred growth. The 2023 RRSP contribution limit is equal to the lesser of 18% of earned income for 2022 and a maximum amount of $30,780.
• Contribute early to TFSAs to increase tax-free growth. The 2023 TFSA contribution limit is $6,500.
• Consider income-splitting opportunities such as prescribed-rate loans.¹⁴
• If you expect to have substantial tax deductions in 2023, consider requesting CRA authorization to decrease tax withheld from your salary by filing Form T1213, Request to Reduce Tax Deductions at Source.

Alan Roth, Toronto

A good way to save tax is by understanding the personal income tax deductions and credits that are available to you. To enhance the benefit of tax deductions and credits, consider these tips and reminders while you’re preparing your 2022 T1 income tax return (T1 return). Although there are several available tax deductions and credits, including provincial and territorial ones, this article will focus on some of the more common federal ones.

New tax deduction for 2022

Labour mobility deduction for tradespeople: Effective for 2022 and later years, if you work as a tradesperson or apprentice in the construction industry, you may be able to claim a deduction for certain travel and relocation expenses you incur in connection with a temporary relocation. You can even claim the costs of several temporary relocations in the same taxation year, provided the total amount does not exceed the maximum annual amount allowed.

The amount you can claim as a deduction for each temporary relocation is limited to half of your employment income as a tradesperson or apprentice from worksites at the temporary location. You can claim up to $4,000 per year as a deduction in respect of all temporary relocations (combined) for a particular year. If your eligible expenses exceed these limits, they may potentially be claimed in the following taxation year. There are several conditions that apply.

For further details, see Managing Your Personal Taxes 2022-23, Chapter 8: Employees.

Tax credits that are either new or revised for 2022

First-time home buyers’ tax credit: First-time home buyers who acquire a qualifying home may be eligible to claim this non-refundable federal income tax credit. As announced in the 2022 federal budget, the maximum credit is doubled from $750 to $1,500, effective for qualifying homes purchased on or after January 1, 2022.

Home accessibility tax credit: The home accessibility tax credit is a non-refundable tax credit designed to help seniors and persons with disabilities live more independently in their own homes by encouraging home renovations that improve accessibility, safety and functionality. The credit is equal to 15% of eligible renovation or alteration expenditures incurred, up to an annual limit. The annual limit on qualifying expenditures has been doubled from $10,000 to $20,000, effective for qualifying expenditures incurred in 2022 and later years. 

For further details on the first-time home buyers’ and home accessibility tax credits, see the December 2022 issue of TaxMatters@EY.

Air quality improvement tax credit: A new temporary 25% refundable tax credit has been introduced to encourage eligible small businesses to invest in better ventilation and air filtration to improve indoor air quality. The credit is limited to a maximum of $10,000 in qualifying expenditures per qualifying location and a maximum of $50,000 across all qualifying locations incurred between September 1, 2021 and December 31, 2022. A qualifying location generally includes real property located in Canada that is used primarily in ordinary commercial activities. The credit must be claimed in your 2022 T1 return. If your business had qualifying expenditures that were incurred between September 1, 2021 and December 31, 2021, you must claim these expenditures on your 2022 T1 return, along with qualifying expenditures incurred in 2022.

For further details on eligibility and qualifying expenditures, see the December 2022 issue of TaxMatters@EY.

Other common tax deductions

Child care expenses: If you paid qualifying child care expenses for an eligible child to allow you to work or attend certain educational programs, you may be able to claim a deduction. The limits are generally $8,000 for each child under 7 years of age and $5,000 for each child between 7 and 16 years of age. A higher amount may be claimed for a child who has a disability. The total deduction claimed for all children cannot exceed two-thirds of your earned income. Earned income for this purpose includes employment income or net self-employment income (either alone or as an active partner) and certain financial assistance payments, including COVID-19-related federal, provincial, or territorial relief benefits.

Interest expense: If you borrowed money for the purpose of making an income-earning investment, the interest expense incurred should be deductible.

Moving expenses: If you moved in 2022 to start a new job or a new business, or to attend university or college on a full-time basis, you may be able to claim expenses relating to the move. 

Other common tax credits

Tuition: A tuition tax credit is available to students for tuition and various ancillary fees. The tuition must generally be paid to an educational institution in Canada or a university outside Canada¹ and the total course fee must be higher than $100. Various examination fees paid to obtain a professional status or to be licensed or certified to practice a profession or trade in Canada may also be eligible. But the cost of supplies, equipment and student fees, as well as fees for admission examinations to begin study in a professional field are not deductible or creditable. Many students do not earn enough income to fully use this credit. In this case, for federal purposes, you may transfer up to $5,000 of unused tuition amounts to certain close family members (such as a spouse, parent, or grandparent) who can use the amounts in their own T1 return (provincial amounts may vary). Any amounts not used by the student and not transferred may be carried forward and used — but only by the student — in any subsequent year.

Canada training credit: The Canada training credit is a refundable tax credit that is available to help you cover the cost of up to one-half of eligible tuition and fees associated with training. Eligible individuals² who have either employment or business income may accumulate $250 each year in a special notional account (your “training amount limit”) which can be used to cover the training costs. The amount of the credit that you are able to claim in a taxation year is equal to the lesser of one-half of the eligible tuition and fees paid in respect of the year and your balance in the notional account. For purposes of this credit, eligible tuition and fees must be levied by a Canadian educational institution. The Canada training credit claimed reduces the amount that would otherwise qualify as an eligible expense for the tuition tax credit.

The $250 amount may only be added to your notional account each year if you file your T1 return for the preceding tax year. Therefore, you must file your 2022 T1 return to have $250 added to your notional account for the 2023 taxation year.

Charitable donations: The federal tax credit for donations is available in two stages ― a low-rate 15% credit on the first $200 of donations and a high-rate (33% and/or 29%) credit on the remainder. Higher-income donors can claim a 33% tax credit on the portion of donations made from income that is subject to the 33% highest marginal tax rate.³ Otherwise, the 29% rate applies.

Disability: The disability tax credit (DTC) is available when an individual is certified by an appropriate medical practitioner as having a severe and prolonged mental or physical impairment — or a number of ailments — such that the individual’s ability to perform a basic activity of daily living is markedly restricted or would be without life-sustaining therapy. To claim the credit, the individual (or a representative) must file Form T2201, Disability Tax Credit Certificate, which must be signed by a specified medical practitioner. The federal DTC base amount for 2022 is $8,870, resulting in a non-refundable tax credit of $1,331. The provinces and territories provide a comparable credit.

For more information about the DTC and the other improvements made to access this credit, see the May 2022 issue of TaxMatters@EY.

Medical expenses: The claim for the medical expense tax credit is limited by an income threshold. In other words, the lower your net income, the more you may be able to claim in eligible medical expenses. For 2022, this credit may be claimed for eligible expenses in excess of the lower of $2,479 and 3% of net income. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, it generally makes sense to claim all expenses in the lower-income spouse’s T1 return (unless the lower-income spouse owes no tax), including the expenses of dependent children under the age of 18. You might be able to claim the medical expenses paid for other dependent relatives such as elderly parents or grandparents or children 18 years of age or older, but in this case, the income threshold for 2022 is equal to eligible expenses in excess of the lower of $2,479 and 3% of the dependent’s net income.

Conclusion

This tax season, make sure you claim all the tax deductions and credits you’re eligible for. There are several other tax deductions and credits you may claim if you are eligible to do so. The deductions and credits discussed above, and the ones listed below, are discussed in further detail in Managing your Personal Taxes 2022-23:

• Deductions for RRSP contributions
• Deductions and credits available to individuals carrying on an unincorporated business or professional practice
• Adoption expenses credit
• Digital news subscription tax credit
• Canada caregiver credit
• Labour-sponsored venture capital corporations tax credit

Caitlin Morin and Lawrence Levin, Toronto

In McCullough v The King, the Tax Court of Canada recently found that an employee was entitled to deduct travel expenses incurred in the course of a 19-month assignment to assist the employer’s sister company in the United States. The court held that the employee was ordinarily required to carry on the duties of employment away from the employer’s place of business, and that the expenses at issue were incurred in the performance of those duties.

Background and facts

The employee was employed as an industrial engineer for a Canadian company. In 2017, the employee signed an addendum to his employment contract with the Canadian company to include temporary work assisting a sister company in the US.

From August 2017 to April 2019, the employee worked as a senior director for the US sister company. This required the employee to spend two to three weeks per month at the US sister company’s office, which was approximately an 8-hour drive from his home in Canada. When he was not working at the sister company’s office in the US, the employee continued his duties with the Canadian company at its Ontario headquarters.

The addendum to the employee’s employment contract stated that he was responsible for the costs of travel to the US office. Neither the Canadian company nor the US sister company reimbursed the employee for these expenses. At all times, the Canadian company paid the employee’s wages.

When filing his income tax return for 2017 and 2019, the employee claimed a deduction in computing his employment income for the travel expenses incurred to perform his duties for the US sister company. The CRA disallowed the expenses on the basis that they were personal expenses and therefore were not deductible under paragraph 8(1)(h) of the Income Tax Act (the Act).

The employee appealed the reassessment.

Court’s analysis and decision

The issue before the court was whether the travel expenses the employee incurred were deductible under paragraph 8(1)(h) of the Act.

Paragraph 8(1)(h) allows an employee to claim a deduction for travel expenses — other than motor vehicle expenses — if the employee was “ordinarily required” to work “away from the employer’s place of business or in different places” and was required under the contract of employment to pay the travel expenses incurred in the performance of their employment duties.

Ordinarily required

The court reviewed jurisprudence elaborating on the meaning of “ordinarily” and “required,” and concluded that the employee was ordinarily required to perform his work duties away from his employer, the Canadian company.

The court remarked that the “ordinarily” criteria is met when “a clearly defined portion of the employee’s duties regularly demand absence from the customary place of employment from time to time.” Since the employee carried out his employment duties at the US office for two to three weeks every month from August 2017 to April 2019, the court found that he was ordinarily required to work away from his employer, the Canadian company.

The court found that the “required” criteria for the purposes of paragraph 8(1)(h) of the Act were met because the addendum to the employee’s employment contract required him to perform the employment duties for the US sister company and pay for his own travel to the US to perform those duties.

Employer’s place of business

The court reviewed jurisprudence considering the meaning of “employer’s place of business” and concluded that the employee’s employment situation was similar to situations considered by courts in other cases in which the location of a temporary assignment in another city was not considered to be the employer’s place of business. The court cited Freake v The Queen,¹ in which the court found that the field locations where an employee worked in the US were not the employer’s place of business because the employee only worked at a given field location for a temporary project and then returned home to Canada.

The court gave weight to the employee’s testimony that the assignment to the US sister company’s office was only temporary. Since the employer’s place of business was in Ontario and the employee only travelled back and forth between Ontario and the sister company’s office in the US for a period of 19 months, the court concluded that the travel constituted travel away from the employer’s place of business.

Traveling in the course of the office or employment

The court remarked that there are two lines of cases with respect to whether travel is in the course of the office or employment:

• The first accepts that travel from an employee’s home to various work sites is travel in the course of employment.
• The second finds that travel from an employee’s home to a work site is inherently personal unless it can be shown that the travel was required to fulfill an employment obligation.

The court accepted that the employee’s trips to the US were travel in the course of employment. This conclusion appears to be based on the addendum to the employee’s employment contract, which required him to travel to the US sister company’s office. The court read into this that the travel was required to fulfill an employment obligation.

The court allowed the appeals on the basis that in computing his employment income for the 2017 and 2019 taxation years, the employee was entitled to deduct the travel expenses under paragraph 8(1)(h) of the Act.

Lessons learned

Because McCullough is an informal procedure case, the results are not binding on the CRA or any other court, even where the facts are very similar. However, informal procedure decisions can offer informative lessons and they often have influential value for other judges.

This decision provides useful commentary on the criteria for an employee to deduct travel expenses under paragraph 8(1)(h) of the Act. The court clarified that an employer’s place of business is not necessarily any new place the employee attends to carry out employment duties. If an employee is temporarily required to work at a related company’s place of business, that location may not be considered the employer’s place of business.

It’s common for employers to reimburse employees for certain travel expenses. It remains to be seen whether McCullough will have influential value where the issue before the court is whether a reimbursement an employer provides for travel from an employee’s home to a place of work gives rise to a taxable benefit under paragraph 6(1)(a) of the Act.

However, it is noteworthy that in the case of a reimbursement for travel expenses, the focus of the courts’ analysis is generally on whether the reimbursement is for travel from the employee’s home to a regular place of employment, which is generally considered to be personal travel, or for travel by the employee between two places of work, which is generally considered to be travel in the course of employment. Notably, the CRA has indicated that it is possible for an employee to report to more than one regular place of employment.

Conversely, the analysis under paragraph 8(1)(h) of the Act considers whether the employee was traveling “away from the employer’s place of business” or in different places. A location could potentially be an employee’s regular place of employment, such that a reimbursement for the cost of travel between the employee’s home and that location would give rise to a taxable benefit under paragraph 6(1)(a), but not an “employer’s place of business,” such that the employee may be entitled to claim expenses for travel to that location under paragraph 8(1)(h) if the employee was required to pay for the expenses.

Alternatively, the exemption under subsection 6(6) of the Act may be available where an employee receives a reimbursement or allowance for travel expenses related to temporary employment at a location that qualifies as a special work site.

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Summary

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