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Salaried vs commission employee

From tax expert Gerry Vittoratos
August 22, 2019

In this instalment, we will see the differences between what can be claimed as employment expenses between a salaried employee and a commission income employee, and how we can optimize the employment expenses claim.

Definition of commission income employee

As per 8(1)(f) of the ITA, a commission income employee is defined as a taxpayer who was employed in the year relating to the selling of property or negotiating of contracts. There are 4 conditions listed in the same section of the act for the commission income employee to be able to deduct expenses related to their job:

  • under the contract of employment, they were required to pay their own expenses (T2200 required) [ITA 8(1)(f)(i)]
  • was ordinarily required to carry on the duties of the employment away from the employer’s place of business, [ITA 8(1)(f)(ii)]
  • at least part of their remuneration was paid in the form of commissions or other similar amounts [ITA 8(1)(f)(iii)]
  • were not in receipt of a non-taxable allowance for travel expenses in respect of the taxation year [ITA 8(1)(f)(iv)].

Most employment expenses deductible under 8(1)(f) of the ITA are limited to the commission income gained by the employee (more on this in the relevant section below). These employees can choose to claim their expenses as a salaried employee instead and not be subject to this limitation; however, they will be denied certain other expenses, specifically sales-related expenses (see summary table below). This is what is commonly referred to in tax circles as the “salesperson’s dilemma”.  We have a handy step-by-step guide below that will help you decide which way to go in solving the dilemma. Before solving it, we will need to understand the basics of employment expenses for these employees.

Expenses that can be claimed by both types of employees

Most expenses allowed under the Income Tax Act in section 8 can be claimed by both types of employees. Some examples of these are motor vehicle expenses [ITA 8(1)(h) or (h.1)], supplies [[ITA 8(1)(f) or (i)], professional dues [ITA 8(1)(f) or (i)], office rent [ITA 8(1)(f) or (i)], home-office expenses (certain differences apply, see table below) etc.

Expenses that can be only be claimed by commission income employees

Some employment expenses can only be claimed by commission income employees. These expenses are directly related to the process of selling, such as advertising, gifts or promotional items to clients, meals and entertainment (with clients), property taxes and home insurance under home-office expenses (not allowed for a salaried employee) and so on. The table below summarizes what is deductible for each type of employee.

 

Allowable expense

Commission income

Salaried employee

Legal Fees (related to salaries) [ITA 8(1)(b)]

X

X

Travel expenses (Hotel, plane, etc.) [ITA 8(1)(h) or 8(1)(f)]

X

X

Meals (50% limit applies, not including meals with clients) [ITA 8(4)]

X

X

Motor vehicle expenses (all types) [ITA 8(1)(j)]

X

X

Professional Dues [ITA 8(1)(i) or 8(1)(f)]

X

X

Union Dues [ITA 8(1)(i) or 8(1)(f)]

X

X

Supplies [ITA 8(1)(i) or 8(1)(f)]

X

X

Office Rent [ITA 8(1)(i) or 8(1)(f)]

X

X

Advertising [ITA 8(1)(f)]

X

 

Gifts or promotional items [ITA 8(1)(f)]

X

 

Electricity, heat, water (home office) [ITA 8(1)(f) or 8(13)]

X

X

Maintenance (home office) [ITA 8(1)(f) or 8(13)]

X

X

Rent (home office) [ITA 8(1)(f) or 8(13)]

X

X

Property taxes (home office) [ITA 8(1)(f) or 8(13)]

X

 

Insurance (home office) [ITA 8(1)(f) or 8(13)]

X

 

Meals and entertainment (50% limit applies, client meals) [ITA 8(1)(f)]

X

 


Limited commission income employee expenses

We saw above that most allowable expenses for commission income employees are limited to the commission income gained. There are exceptions to this rule. The table below summarizes what is limited, and what isn’t.

Allowable expense

Subject to commission income limit?

 

YES

NO

Legal Fees (related to salaries) [ITA 8(1)(b)]

 

Travel expenses (Hotel, plane, etc.) [ITA 8(1)(h) or 8(1)(f)]

 

Meals (50% limit applies, not including meals with clients) [ITA 8(4)]

 

Fuel (motor vehicle expenses) [ITA 8(1)(j)]

 

Maintenance and repairs (motor vehicle expenses) [ITA 8(1)(j)]

 

Licence and Registration (motor vehicle expenses) [ITA 8(1)(j)]

 

Capital Cost Allowance (motor vehicle expenses) [ITA 8(1)(j)]

 

Interest (motor vehicle expenses) [ITA 8(1)(j)]

 

Leasing Costs (short-term) (motor vehicle expenses) [ITA 8(1)(j)]

 

Parking (motor vehicle expenses) [ITA 8(1)(j)]

 

Professional Dues [ITA 8(1)(i) or 8(1)(f)]

 

Union Dues [ITA 8(1)(i) or 8(1)(f)]

 

Supplies [ITA 8(1)(i) or 8(1)(f)]

 

Office Rent [ITA 8(1)(i) or 8(1)(f)]

 

Advertising [ITA 8(1)(f)]

 

Gifts or promotional items [ITA 8(1)(f)]

 

Allowable expense

Subject to commission income limit?

 

YES

NO

Electricity, heat, water (home office) [ITA 8(1)(f) or 8(13)]

 

Maintenance (home office) [ITA 8(1)(f) or 8(13)]

 

Rent (home office) [ITA 8(1)(f) or 8(13)]

 

Property taxes (home office) [ITA 8(1)(f) or 8(13)]

 

Insurance (home office) [ITA 8(1)(f) or 8(13)]

 

Meals and entertainment (50% limit applies, client meals) [ITA 8(1)(f)]

 

 

Step-by-step guide in choosing between salaried and commission income employee expenses

As mentioned above, a commission income employee can choose to be a salaried employee for their employment expenses in order to avoid the commission income limitation. This step-by-step guide will help to make the right decision.

Step 1

List the deductible expenses and determine if the expense incurred is deductible for all employees or just commission income employees (use the table above as your guide).

Step 2

List expenses that are not subject to the commission income limit (use the second table above as your guide).

Step 3

Calculate the total amount of eligible expenses that are subject to the commission income limit and compare this amount to that of the commissions received. If these expenses exceed the amount of commissions received, determine whether this excess amount can be recouped if you were to consider yourself a salaried employee instead.

Step 4

Based on the results of Step 3, calculate your total expenditures as if you’re a salaried employee. Compare with the results obtained in step 3. Choose the optimal solution. 

The salesperson’s dilemma can be a little hard to solve. We hope that this article will help in resolving the ultimate choice for commission income employees.

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