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Can the price of luxurious clothes, when worn to work by an worker of a high-end style retailer, be a sound tax-deductible employment expense? That was the difficulty earlier than the tax court docket in a current case heard final month.
The taxpayer labored for
from 1994 to 2019 as a chosen gross sales affiliate, and a model specialist for
. In her 2016, 2017 and 2018 taxation years, she deducted the price of luxurious clothes and numerous house workplace bills. The difficulty earlier than the court docket was whether or not she was required to incur these bills as a situation of her employment.
The Holts costume code required a “well-groomed and businesslike look” to determine credibility with clients. The taxpayer was anticipated to be entrepreneurial, aggressive and self-motivated and to ship extraordinary customer support.
Selling the manufacturers by sporting their merchandise was vital to reaching gross sales targets, and the taxpayer achieved “Silver Elite” standing for 5 consecutive years, which means having no less than $1 million of gross sales on the Bloor Avenue, Toronto location. The taxpayer was partly compensated by means of commissions on gross sales.
The taxpayer testified that the specialist designated gross sales affiliate program obligated her to put on distributors’ manufacturers, to attain and exceed gross sales standards. The specialist program doc submitted into proof included, amongst different issues, expectations to fulfill gross sales targets, together with demonstrating entrepreneurial initiative and management, and utilizing their clothes allowance to put on and promote the merchandise they signify.
To this finish, the taxpayer obtained a clothes allowance of $2,000 per season, for every of the 2 style seasons annually. She was capable of buy usually priced objects at half value, so the retail value equal of her annual clothes reimbursement was $8,000. She may additionally purchase objects that had been on sale with an additional one-third value discount, however the brand new inventory was by no means on sale at the beginning of the season, so there was little incentive to buy sale objects since they’d be out-of-date.
The taxpayer maintained that she needed to buy further clothes at her personal expense, which she stated she wore completely for work, as a result of she felt that the clothes allowance was “insufficient.” The taxpayer believed that buying and sporting further high-end clothes for work would assist her obtain higher fee revenue.
She testified that she bought and used high-end garments for work solely, and that put on and tear all through a gross sales season depleted the objects. She defined that her workdays concerned usually going up flights of stairs and into an attic storeroom, and that it was potential “to hitch garments on edges within the storeroom and on the steel staircases.” She stated that broken garments couldn’t be reused, and that the garments wouldn’t be reusable year-over-year as a result of kinds change, and he or she wanted to stay “present.”
On high of the clothes allowance, the taxpayer was reimbursed by Holts for bona fide employment-related bills, together with month-to-month cellphone prices, taxi prices, and meals and lodging if travelling for work, for instance, to seasonal product information occasions.
The
denied the taxpayer’s clothes bills, saying they weren’t deductible as they had been private expenditures. When the taxpayer was audited, she tried to get signed
Kind T2200 “Declaration of Situations of Employment”
from Holts for every of the taxation years below overview. The corporate refused to supply these varieties as a result of, in its view, she was not required to incur bills as a situation of employment. She was informed that firm coverage was in opposition to issuing T2200 varieties to staff and additional, in the event that they had been to concern her T2200s, they’d not affirm any obligation to incur employment bills.
The difficulty earlier than the court docket was whether or not the taxpayer was required, as a situation of her employment, to incur the bills. The courts have present in prior circumstances that this requirement could also be an specific or implied situation of employment.
Whereas the decide discovered the taxpayer to be “credible and forthright,” including that when requested a query to which she didn’t know the reply, she admitted it, and “didn’t try to obfuscate or have interaction in prolix meandering,” nonetheless, the proof submitted at trial merely didn’t help any requirement by Holts for her to purchase garments, at her personal expense, as a situation of her employment.
The decide even thought-about whether or not incurring employment bills was an “implicit criterion of employment.” This may be the case the place an worker would possibly obtain a unfavourable efficiency analysis, or any disciplinary motion, for failing to take sure steps and incur associated bills. Within the current case, there was no proof in regards to the taxpayer’s clothes that will help an implicit requirement argument primarily based on any hostile steps that Holts could have taken or threatened.
The decide famous that whereas “it could have been good for (the taxpayer) to decide on to incur bills on her personal account, over and above her allowance, to assist her earn extra commissions … making a sensible financial alternative and being contractually obligated (even implicitly) are totally different.”
Since there was no specific nor implied time period of employment that required the taxpayer to incur the extra clothes bills, the decide discovered them to be non-deductible.
As for her house workplace bills, the Tax Act
limits the deduction of house workplace bills
except the house workplace is the place the place the taxpayer principally performs their duties, or the house is used completely for work and on an everyday and steady foundation for assembly clients or different individuals associated to work.
The taxpayer testified that she labored unpaid hours at house to maintain up with consumer issues, making calls and coping with studies. For instance, on one event, she answered a name in the midst of the evening about delivering a belt earlier than a consumer’s 7 a.m. flight. There was, nevertheless, no contractual requirement that the taxpayer work after common working hours, and any additional time labored was topic to pre-approval.
The decide concluded that for the reason that taxpayer didn’t principally carry out her duties from house, nor did she use the house usually for assembly clients or others within the bizarre course of her work, her house workplace bills weren’t deductible.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP is the Managing Director, Tax & Property Planning with CIBC Personal Wealth in Toronto.
