All You Need to Know About Tax Deductions From Commission Income
Employers offer additional incentives to employees to generate high performance levels in form of bonus or commissions on top of their base salary. Commission employees under the paragraph 8(1)(f) of the Income Tax Act, have the option of deducting a broader range of expenditures from their gross income. In this article, let’s understand the differences between what can be claimed as employment expenses between a salaried employee and a commission income employee.
Who is considered a Commission Employee?
A commission is rewarded by the employer to employee based on the number of sales they make on top of their base salary. A commission is directly tied to sales so it is variable and can change based on the sales activity. Auto salesmen and financial advisors are two types of professionals who typically fall into the category of commission employees.
What expenses are tax deducible?
Generally, expenses incurred by a commission employee in the course of earning his or her commission income are deductible. Such expenditures are referred to as “sales expenses” in paragraph 8(1)(f), and may include the cost of entertaining clients, promotional and advertising expenses, motor vehicle expenses, salary of an assistant, and home office expenses.
There are 4 conditions listed in the paragraph 8(1)(f) of the act for the commission income employee to be able to deduct expenses related to their job:
- under the contract of employment was required to pay the taxpayer’s own expenses,
- was ordinarily required to carry on the duties of the employment away from the employer’s place of business,
- was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and
- was not in receipt of an allowance for travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer’s income,
As a commission employee, you can claim expenses on Form T777, Statement of Employment Expenses, when you file your personal income tax return. These costs commonly include accounting fees, legal fees, and costs for business cards, promotional gifts, cellphones, and automobile expenses.
If you are using your own automobile for employment purposes, you are able to claim a portion of the costs associated with work-related transportation. These automobile expenses include fuel, maintenance, insurance, registration fees, parking, and any interest or leasing costs (up to the limits set).
Any time you are hosting a client at an event, you can deduct 50 percent of the amounts you spend on food, beverages, tickets, and entrance fees for an event as Entertainment Expenses.
If you are required to be away from the office for over 12 hours at a time, you can also claim food and beverage costs. These costs refer to meals for yourself, not those for entertaining a client, and are subject to the 50% rule as well.
Another worthwhile advantage is the ability to claim workspace-in-the-home expenses. Commission employees can claim expenses which the regular salary employees cannot:
- Entertainment costs except for golf club and membership fees
- Advertising and promotions
- Accounting fees
- Capital Cost Allowance CCA
- Car interest
- Home insurance and property taxes when claiming home-office expenses
If you are a commission employee and need more information on what expenses you can claim on your income tax return, contact professional accountants at DM Tax and we can help you identify the optimal approach at the lowest tax cost.