Employee and Self-Employed Tax Deductions

The taxpayer worked for a car dealership, and was employed as a manager. He had an employment contract and was paid $110,000.00 annually.

However, he didn’t want to pay taxes on that amount so he “claimed” (without any proof) that he had to pay both his wife, and his mother-in-law expenses of $55,945 in 2015 and $50,793 in 2016.

He claimed these “payments” as deductions from his own employment income.

The taxpayer testified that he hired his mother-in-law in to do some work using a home laptop computer with a connection to his office files. The work involved completing and closing the file on each vehicle sale, lease or financing arrangement as they occurred, and included entering confidential information of both the customers and the dealership.

Now, the dealership, of course, had never ever heard of this person of knew of the sharing of confidential business information.

The taxpayer (and that’s using the term loosely) testified that his mother-in-law lived with him in the same house, along with his wife and kids, and, he did not actually pay his mother-in-law the money, but rather “credited the amount against monthly rent for her living in his house, and against food charges and transportation charges to her and unspecified credit card or other charges.”

He also testified that his wife was paid by way of monthly amounts of $2,000 being deposited into a joint account held by both spouses. In other words, there was no actual transfer of funds to his wife. No records of payments or hours worked were kept, and his wife didn’t testify in court. (yes, give him credit for that, he saved her from possible perjury)

It is extremely unusual for an employee to attempt this sort of a deduction. It’s only available to the self-employed. However, it certainly takes some “moxie” to head over the Tax Court with these ridiculous claims. “Yes, I never told my boss that I had passed on his secrets to one of my employees!”

All claims for deductions were turned down by the CRA and subsequently by the Tax Court.

Basically, there’s little to nothing in the Income Tax Act which permits deductions for employees

What happens if you are self-employed?

If you are self-employed you can retain close family members to assist you, but the payment

  • must be legitimate,
  • it must be reasonable,
  • it must be competitive in the industry,
  • it must be documented, and
  • it must be reported to the CRA.

If you skip any of these steps then you will likely be subject to an audit.

Brian Madigan LL.B., Broker


Leave a Reply

Your email address will not be published. Required fields are marked *