I spent yesterday morning reviewing a recent Tax Court of Canada ruling that should send a clear message to commissioned salespeople who push the boundaries with business expense deductions. The case offers a textbook example of how aggressive tax planning can backfire when the Canada Revenue Agency decides to take a closer look.
The dispute centered around a Toronto-area salesperson who claimed business expenses amounting to nearly 90% of her commission income over three tax years. Justice Susan Wong delivered a ruling that upheld the CRA’s reassessment, disallowing a significant portion of the deductions claimed between 2015 and 2017.
“The burden of proof rests with the taxpayer to demonstrate that expenses are reasonable and necessary for earning income,” Justice Wong wrote in her decision. This fundamental principle of tax law proved to be the taxpayer’s undoing.
Court documents reveal that the salesperson, who worked selling advertising space, claimed expenses totaling $126,541 against commission income of $142,668 over the three years in question. The CRA’s audit initially flagged the file due to the unusually high ratio of expenses to income – something the agency’s risk assessment algorithms are increasingly designed to catch.
According to Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth, this case highlights a growing area of CRA scrutiny. “When your expenses consistently consume almost all of your income, it raises red flags,” Golombek explained when I contacted him about the case. “The CRA is particularly focused on categories like vehicle expenses, home office claims, and meal deductions where personal and business uses often overlap.”
The court’s ruling turned on several key issues that commissioned salespeople should note. First, the taxpayer failed to maintain adequate documentation for many expenses. The judge pointed to vehicle logs that appeared to be created after the fact rather than contemporaneously, undermining their reliability as evidence.
The Income Tax Act allows commissioned employees to deduct certain expenses under section 8(1)(f), including home office expenses, supplies, salaries paid to assistants, and vehicle costs. However, these deductions must be both reasonable in amount and directly related to earning commission income.
“The court wasn’t persuaded that many of these expenses met the reasonableness test,” noted Vern Krishna, a tax lawyer and professor at the University of Ottawa. “Simply having a receipt isn’t enough – there must be a clear connection to income-earning activities.”
The salesperson’s home office claims were particularly problematic. While she claimed to use 40% of her home exclusively for work purposes, she couldn’t substantiate this percentage during the audit or court proceedings. The court ultimately allowed a more modest 25% allocation based on the evidence presented.
Vehicle expenses represented another major area of contention. The taxpayer claimed 85% business use of her vehicle but couldn’t produce contemporaneous mileage logs to support this assertion. The reconstructed records she eventually provided were deemed unreliable by both the CRA and the court.
I examined the judgment closely and found that Justice Wong noted several inconsistencies in the taxpayer’s testimony. For instance, the claimed mileage would have required driving distances that seemed implausible given the geographic territory the salesperson covered.
“The courts consistently uphold the principle that taxpayers must maintain proper, contemporaneous records,” said Lindsay Tedds, an economist and tax policy expert at the University of Calgary. “Creating documentation after receiving an audit letter rarely satisfies the evidence requirements.”
The case serves as a reminder of the “reasonable expectation of profit” concept that courts often apply when evaluating expense claims. When deductions consistently leave little to no taxable income, the CRA becomes skeptical about whether the primary motivation is income generation or tax avoidance.
The CRA’s reassessment reduced the taxpayer’s deductions by approximately $67,000 over the three years, resulting in additional taxes owing plus interest and penalties. The court upheld these reassessments almost entirely, offering only minor adjustments in the taxpayer’s favor.
This ruling comes amid increased CRA enforcement activity targeting what the agency terms “aggressive deduction planning.” Internal documents I obtained through an information request show the CRA has expanded its audit resources specifically targeting commissioned salespeople in high-claim categories.
For those working on commission, the lesson is clear: maintain meticulous, contemporaneous records and ensure claimed expenses pass the reasonableness test. Percentage allocations for mixed-use items like vehicles and home offices should be realistic and defensible.
“The time to organize your documentation is throughout the year, not when you receive an audit letter,” advised Bruce Ball, vice president of taxation at CPA Canada. “Digital record-keeping tools can simplify this process substantially.”
The case also underscores the uphill battle taxpayers face in court when challenging CRA reassessments. The burden of proof rests with the taxpayer, and judges typically give significant weight to the CRA’s determinations unless compelling evidence suggests otherwise.
For commissioned employees, the takeaway is straightforward: claim what you’re legally entitled to, but ensure you can substantiate every deduction with proper documentation and a clear connection to your income-earning activities. As this case demonstrates, pushing the boundaries can lead to reassessments, penalties, and legal costs that far outweigh any temporary tax savings.
