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tax matters

My cousin Erik has worked for the same company for many years now. "Tim, I'm a little frustrated," he shared with me. "I got a pay raise just big enough to increase my taxes and other payroll deductions but small enough that I think my take-home pay is still the same. I told my boss I'd like to earn a seven-figure salary one day. He reminded me that I'm there already. It's just that there's a decimal place in the middle there somewhere."

Erik went on to lament the fact that employees aren't entitled to claim many tax deductions against income from employment. As we spoke, I shared with him details of one deduction in particular that could be available to many employees. It's not commonly claimed, and it's a shame really. For employees that claim this deduction, it's often the single largest deduction they have.

The deduction

Paragraph 8(1)(i) of our tax law will allow an employee to claim a deduction for salary paid to an assistant. While you might not pay for an assistant currently, there's an opportunity to split income with a family member that generally is thought to be only available to those who are self-employed. Self-employed folks can deduct reasonable salaries paid to family members for services provided.

As an employee, paragraph 8(1)(i) can afford you the same type of income-splitting opportunity. Imagine, for example, if you earned a salary of $100,000 but paid $25,000 to your spouse who has no other income, to assist you in your work. In this example, a taxpayer in Ontario in 2010 would save $5,190 in taxes by shifting $25,000 of income to his or her spouse.

The rules

Paragraph 8(1)(i) of our tax law says that an employee can deduct amounts paid as salary to an assistant or substitute provided the employee was required by his contract of employment to make those payments, and provided the employee has not been reimbursed for those costs.

If you happen to be a sales employee who is compensated in whole or in part by commissions, ordinarily works away from your employer's place of business, is required to pay your own expenses, and didn't receive a tax-free travel allowance, you can deduct a broad array of expenses related to earning your income, including salary paid to an assistant, who may be a family member. In this case, the deduction is allowed under paragraph 8(1)(f) of the Income Tax Act (applies solely to salespeople).

The story

In the court case of Longtin v. The Queen (2006), William Longtin was an employee compensated by way of salary and commissions. He was in charge of his employer's Western Canada region, travelled quite a bit, and frequently entertained customers both at home and elsewhere. The employer knew that Mr. Longtin's wife was working for him and in fact, interviewed her at the time he was hired.

Mr. Longtin's wife performed many tasks, including taking phone calls, replying to e-mail, faxing documents, and organizing functions at their home and elsewhere. She worked about 20 hours per week in 1997 and 1998. CRA tried to deny Mr. Longtin's deduction on the basis that he didn't have a written contract of employment that required him to pay for his own assistant.

Further, CRA requires an employee to obtain a signed Form T2200, "Declaration of Conditions of Employment," to be entitled to claim certain employment expenses. Mr. Longtin provided the form to the taxman, but his employer answered negatively to the question of whether he was required to pay for an assistant. Nevertheless, the court sided with Mr. Longtin and he was entitled to the deduction.

The moral

Want to save tax? Negotiate with your employer the requirement to hire your own assistant - then hire a family member. The Longtin case demonstrates that being "required by the contract of employment" to pay salary to an assistant does not mean that there must be a written contract. A verbal agreement can suffice. Having said this, prudent planning suggests that you and your employer should put in writing, perhaps by way of a letter, the intention that you should pay for your own assistant. A verbal agreement may be hard to prove to the taxman later. Also, although Mr. Longtin was successful despite an incorrectly completed Form T2200, be sure that your employer signs Form T2200 and properly acknowledges on that form that you are required to pay for your own assistant. Keep that form on hand in case CRA wants to see it. This could simplify life later.