In the case of Williams (2004 DTC 3549), the Tax Court had to determine whether an amount had been "expended by the taxpayer", when the taxpayer did not actually pay the expenses in question.
The taxpayer was to be paid commission following the successful offering of securities ofhigh-tech firms. It was agreed that the brokerage firm, by whom the taxpayer was employed, would pay draws (which were treated as employment income by the individual) as advances against his future commissions. To carry out the necessary work, the taxpayer had to travel extensively and had to hire an assistant. In his oral contract, there was no explicit mention of the requirement to hire an assistant.
Unfortunately, the taxpayer never earned commission, as the deals never closed. The taxpayer left the brokerage firm and never repaid the advances. The advances included the amounts paid to the assistant. In the taxpayer's tax returns during this period, he reported advances as income and deducted the expenses related to travel and to his assistant, totalling over $150,000. The CRA claimed that he was not entitled to deduct the expenses for two reasons:
If the CRA's assessment was upheld, the payments to his assistant would not be deductible to anyone because the brokerage firm had reported the amounts as a loan. The result would have been that payments for travel and other expenses as well as the assistant's salary would never have been deducted. The Court ensured the equitable result by holding that the amounts were deductible by the taxpayer.
This is another example of the CRA not being concerned with the overall picture, but merely looking at the narrow facts. In the CRA's opinion, the amount was not expended by the taxpayer and was therefore not deductible. The CRA was not concerned with whether anyone would deduct the expenses. Be aware that the CRA will often look at the facts and make a determination without looking at the big picture as to whether or not it is an equitable result.
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