The source of income for the vast majority of Canadians is from employment. Given its importance to the government as a source of tax revenue, special rules are in place to ensure its integrity and transparency.
Employees are familiar with some of these special rules, particularly those that require employers to withhold and remit tax on their behalf to the government. This pre-payment of tax is based on an estimate of the tax payable by the employee for the year and is adjusted, up or down, when the employee files their tax return in April.
The other major rule that protects the integrity of this revenue source is the rule that denies any deduction other than those specifically allowed. This approach to deductions differs significantly from that for business income or property income.
Form T2200, “Declaration of Conditions of Employment,” is a form that employers must complete for their employees, which then allows employees to deduct some of the permitted expenses. If this form is not completed and filed, the employee will not be able to deduct the related expenses, resulting in a higher tax payable than necessary.
Form T2200 is a two-page document that asks the employer a number of questions to determine an employee’s eligibility to claim the deductions it covers. These include:
- Deductions for expenses incurred by the employee while carrying out the duties of that employee’s employment
- Deductions related to travel away from the employer’s place of business so that the employee could perform his or her duties
- Deductions dealing with the cost of employment-related travel
- Deductions related to the employee’s motor vehicle expenses
- Reimbursements by the employer for expenses incurred by the employee
- Allowances by the employee for expenses to be incurred by the employee
- Deductions for expenses of commissioned employees
- Deductions related to home office expenses
- Deductions related to the rent or lease payment for an office away from the employer’s place of business
- Deductions related to expenses for substitutes or assistants
- Deductions related to expenses for supplies needed by the employee to perform the duties of employment
- Deductions related to the use of a cell phone by the employee
- Deductions specific to trade persons’ tools for use in their employment
- Deductions specific to employees who work in forest operations
Once completed by the employer, the form must be certified. This allows the government to determine whether the employee meets the conditions for claiming the corresponding deductions. Certain specific expenses, such as those related to the home office deduction, have additional conditions that must be met.
Record Keeping and Documentation
The Canada Revenue Agency requires employees to retain detailed records for each deduction, including original receipts, mileage logs, and any other supporting materials that verify amounts claimed.
Inadequate or missing documentation is a common reason deductions are denied during reviews or audits. To protect your claims, maintain organized records for at least six years, ensuring each item clearly ties to a specific eligible expense and period.
Calculation Methods for Expenses
When completing Form T2200, employees can choose between different methods for calculating eligible expenses, depending on the type of cost and available documentation.
For home office and vehicle expenses, the CRA offers both detailed and simplified approaches. The detailed method requires precise tracking of costs and usage, supported by receipts and usage logs.
The simplified method uses fixed rates and minimal documentation but may result in lower claims. Selecting the appropriate method depends on the nature of the expenses, the quality of your records, and which approach yields the most accurate deduction.
Frequently Asked Questions & Common Issues
Many employees are unclear about the eligibility and documentation requirements for Form T2200. A common misconception is that the form itself entitles you to a deduction, or that if an employer signs the form, all related expenses will be accepted automatically; this is not the case. Form T2200 only certifies that certain conditions of employment were met; it does not guarantee that all claimed expenses are eligible as deductions.
Issues also arise when employees claim expenses without proper receipts or attempt to deduct costs that are considered personal or non-essential to their job duties. Misreporting square footage for a home office or failing to separate personal and business vehicle use are common examples.
Understanding the rules and maintaining accurate records are essential for avoiding reassessments or denied claims.
As experienced and licensed CPA tax consultants, we help our clients handle all tax and accounting issues. Give us a call today at 1 844 340 5771 to schedule an assessment.
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