Client: Kim D.
Chemicals Manufacturer Sales Representative
Issue: Writing off home expenses
Prior to starting court, we were able to have all the clearly documented expenses accepted. In court we faced Chief Justice Bowman, a man with a reputation for wisdom and wit, not to mention impeccable knowledge of tax law. When a Chief Justice is presiding, you can be sure that his or her ruling will be looked at by the tax lawyers across the land. The question of the day was: “Is a sales rep entitled to claim business use of home expenses?”
If she did not pass the stringent criteria as outlined in the law, then not only could our client not take the deductions, then neither could the other sales reps from this company. Even more significantly, neither could any other commissioned sales representative in Canada claim home expenses. Because the way the law has been interpreted to date, no outside sales rep could ever qualify for these deductions because sales representatives by the nature of their job spend most of their time away from their homes.
CRA had been able to successfully disallow all these expenses in their audits across the land. It became clear in our negotiations with the tax litigator that they were not going to back off on this point and believed they could get the court to agree with them, based on how the law is written and how it had been repeatedly interpreted over the years.
CRA’s lawyer was a knowledgeable and tough litigator with considerable experience in law. So CRA was well-positioned to prevail on this contentious issue. Dan White argued for our client. Dan, of course, is not a lawyer. Having the judge rule in our favor was a surprise to the CRA lawyer. We won in part because of excellent preparation work by our team. And we had a credible witness. And finally, we were able to make a logical case that could not be swatted away.
The first thing we had to do was to remove any shadow of doubt as to whether our client was required to use his home for doing business.
Here’s how we were able to establish required use:
We submitted a T2200 form signed by the client’s employer.
We presented a letter signed by a manager of the client’s employer, stating it was mandatory to use her home as a place of business. The lawyer for CRA objected based on the letter being “hearsay.” The judge overruled the objection based on the procedures around hearsay have become broader over recent years; he asked to see the letter and then simply asked the client if she believed the letter to be real. The judge stated that while the letter was not strong evidence, he entered it as evidence.
We presented her employment contract.
We provided a detailed sketch of the entire premises — the CRA lawyer argued that the sketch did not have any actual measurements on it. The judge did allow for the garage and basement to be considered business use.
We had a picture of her work area… Having her dog in the picture did create a few chuckles and human interest.
We had pictures of the equipment that required space to be housed in her home.
We had a witness who reeked of credibility and corroborated each point.
Points 1 to 7 removed any doubt that the home was required for the client to perform her contracted duties. From there we had to argue the intent of the law. And; we also had to argue the interpretation of the law. The law was clear. The premises must be used primarily for business, and must be used for business 100% of the time, in order to be deductible as an employment expense.
We argued that there could be no business premises anywhere fulfilling that description, as all business space is used from time to time for personal purposes, such as calls from your family, etc. If that was a hard and fast rule, all business premises would revert to personal. We argued that Primary Purpose should be interpreted as: “What is the primary use of the space when it is being used?”, rather than to ask, “What is the space primarily used for twenty-four hours a day?”
We argued that during the time the space is not used for any purpose, it defaults to “no use at all.” rather than personal use. In other words if the only time you use a space is for business, then even if you use the space for only an hour a day it is still used 100% of the time for business.
Upon hearing this argument the judge stopped Dan White, took off his glasses, waved them in the air in circles, and declared a recess while he went to get a desk copy of the income tax act. He returned and studied the act for what probably was a few minutes but felt like an eternity. He then declared with great wisdom and presence. “In fact, there are two ways to interpret the clauses and, as such, we have to consider the new interpretation”.
There was much argument for precedent from the CRA lawyer, but the judge was not buying it, because the way the clause had been interpreted in the past did not make sense with the new but valid interpretation. The judge ruled in our favor and declared the home expenses for our client as deductible employment expenses. What this means is our client’s employers’ other reps can now write off their home use expenses.
But most of all, sales representatives from across the country can use this court case as a precedent and, being that it was Chief Justice Bowman who so ruled, it carries huge weight. This interpretation of the law will also apply to non sales representatives as well because the same sections of the act apply.