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Can the price of luxurious clothes, when worn to work by an worker of a high-end trend retailer, be a sound tax-deductible employment expense? That was the problem earlier than the tax court docket in a current case heard final month.
The taxpayer labored for
from 1994 to 2019 as a delegated gross sales affiliate, and a model specialist for
. In her 2016, 2017 and 2018 taxation years, she deducted the price of luxurious clothes and numerous dwelling workplace bills. The problem earlier than the court docket was whether or not she was required to incur these bills as a situation of her employment.
The Holts costume code required a “well-groomed and businesslike look” to ascertain credibility with clients. The taxpayer was anticipated to be entrepreneurial, aggressive and self-motivated and to ship extraordinary customer support.
Selling the manufacturers by sporting their merchandise was necessary to attaining gross sales targets, and the taxpayer achieved “Silver Elite” standing for 5 consecutive years, which means having a minimum of $1 million of gross sales on the Bloor Avenue, Toronto location. The taxpayer was partly compensated by the use of commissions on gross sales.
The taxpayer testified that the specialist designated gross sales affiliate program obligated her to put on distributors’ manufacturers, to attain and exceed gross sales standards. The specialist program doc submitted into proof included, amongst different issues, expectations to fulfill gross sales targets, together with demonstrating entrepreneurial initiative and management, and utilizing their clothes allowance to put on and promote the merchandise they symbolize.
To this finish, the taxpayer acquired a clothes allowance of $2,000 per season, for every of the 2 trend seasons every year. She was capable of buy recurrently priced gadgets at half value, so the retail value equal of her annual clothes reimbursement was $8,000. She might additionally purchase gadgets that have been on sale with an extra one-third value discount, however the brand new inventory was by no means on sale at first of the season, so there was little incentive to buy sale gadgets since they might be out-of-date.
The taxpayer maintained that she needed to buy further clothes at her personal expense, which she mentioned she wore completely for work, as a result of she felt that the clothes allowance was “insufficient.” The taxpayer believed that buying and sporting further high-end clothes for work would assist her obtain better fee revenue.
She testified that she bought and used high-end garments for work solely, and that put on and tear all through a gross sales season depleted the gadgets. She defined that her workdays concerned recurrently going up flights of stairs and into an attic storeroom, and that it was potential “to hitch garments on edges within the storeroom and on the steel staircases.” She mentioned that broken garments couldn’t be reused, and that the garments wouldn’t be reusable year-over-year as a result of kinds change, and she or he wanted to stay “present.”
On prime of the clothes allowance, the taxpayer was reimbursed by Holts for bona fide employment-related bills, together with month-to-month mobile phone prices, taxi prices, and meals and lodging if travelling for work, for instance, to seasonal product data occasions.
The
denied the taxpayer’s clothes bills, saying they weren’t deductible as they have been private expenditures. When the taxpayer was audited, she tried to get signed
Type T2200 “Declaration of Circumstances of Employment”
from Holts for every of the taxation years below overview. The corporate refused to supply these types as a result of, in its view, she was not required to incur bills as a situation of employment. She was instructed that firm coverage was in opposition to issuing T2200 types to staff and additional, in the event that they have been to situation her T2200s, they might not verify any obligation to incur employment bills.
The problem earlier than the court docket was whether or not the taxpayer was required, as a situation of her employment, to incur the bills. The courts have present in prior circumstances that this requirement could also be an categorical or implied situation of employment.
Whereas the decide discovered the taxpayer to be “credible and forthright,” including that when requested a query to which she didn’t know the reply, she admitted it, and “didn’t try and obfuscate or interact in prolix meandering,” nonetheless, the proof submitted at trial merely didn’t assist any requirement by Holts for her to purchase garments, at her personal expense, as a situation of her employment.
The decide even thought of whether or not incurring employment bills was an “implicit criterion of employment.” This may be the case the place an worker may obtain a adverse efficiency analysis, or any disciplinary motion, for failing to take sure steps and incur associated bills. Within the current case, there was no proof in regards to the taxpayer’s clothes that will assist an implicit requirement argument based mostly on any opposed steps that Holts might have taken or threatened.
The decide famous that whereas “it could have been good for (the taxpayer) to decide on to incur bills on her personal account, over and above her allowance, to assist her earn extra commissions … making a wise financial selection and being contractually obligated (even implicitly) are totally different.”
Since there was no categorical nor implied time period of employment that required the taxpayer to incur the extra clothes bills, the decide discovered them to be non-deductible.
As for her dwelling workplace bills, the Tax Act
limits the deduction of dwelling workplace bills
except the house workplace is the place the place the taxpayer principally performs their duties, or the house is used completely for work and on a daily and steady foundation for assembly clients or different individuals associated to work.
The taxpayer testified that she labored unpaid hours at dwelling to maintain up with shopper issues, making calls and coping with stories. For instance, on one event, she answered a name in the midst of the night time about delivering a belt earlier than a shopper’s 7 a.m. flight. There was, nevertheless, no contractual requirement that the taxpayer work after common working hours, and any extra time labored was topic to pre-approval.
The decide concluded that for the reason that taxpayer didn’t principally carry out her duties from dwelling, nor did she use the house recurrently for assembly clients or others within the atypical course of her work, her dwelling workplace bills weren’t deductible.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP is the Managing Director, Tax & Property Planning with CIBC Non-public Wealth in Toronto.
