Commissioned Salespeople and Employment Expenses: What Happens When the Payment Goes to a Family Member

0 Comments

Commissioned Salespeople and Employment Expenses: What Happens When the Payment Goes to a Family Member

 If you earn commission income, you already know that paragraph 8(1)(f) of the Income Tax Act lets you deduct certain expenses incurred to earn that income. What is less obvious is how much documentation the Tax Court expects before it accepts that a payment was actually made, and actually made for business reasons.

A recent case involving Jean-Marie Robillard sets out the answer with unusual clarity. You can read the full decision on the Tax Court of Canada website. Two expense claims went before the Court. The facts around each were similar in outline; the paper behind them was not. One claim was denied and the other was allowed.

Here is what happened, and what commissioned employees can take from it.

Watch this on YouTube: https://youtu.be/rv0ENfcLczw

The Background

Mr. Robillard worked as a commissioned salesperson selling Lennox heating and cooling systems. His leads came in part from a booth set up at a Costco entrance, where shoppers filled out slips indicating interest in a furnace or an air conditioner. Those slips turned into phone calls, appointments, and eventually sales commissions.

On his 2016 and 2017 personal tax returns, he claimed employment expenses under paragraph 8(1)(f). The CRA reviewed both years, allowed his vehicle expenses, and denied two categories of claim:

  • roughly $20,000 per year that he said was paid to his spouse, Liette, for making calls to prospects and booking appointments; and
  • smaller amounts that he said were paid to Fernand Doucet, a man known locally for removing old furnaces, who referred potential customers to him.

Both amounts were connected to generating sales. Both were disputed. The Court considered each on its own evidence.

The Payments to His Spouse

Mr. Robillard’s position was that his spouse handled a real workload: calling people who had filled out slips at the Costco booth, following up, and scheduling appointments for him.

The difficulty was the record.

There was no written agreement setting out what she would do or what she would be paid. There were no call logs or appointment records showing the work performed. There were no invoices. There were no bank deposits into an account in her name that lined up with the amounts claimed.

What the Court found instead was that the amounts characterized as payments were household expenditures; joint mortgage payments and cash withdrawals from shared accounts. Money moving inside a household does not, on its own, establish that one spouse paid the other for services rendered.

Without a trail connecting a specific amount to specific work performed, the Court concluded the deduction could not stand. The claim for the spouse-related payments was denied for both years.

The Referral Fees

The referral fees went the other way.

Mr. Doucet removed old furnaces in the area and, in the course of that work, encountered homeowners who were about to need a replacement. He passed those contacts to Mr. Robillard.

Here the evidence looked different. Mr. Robillard produced invoices from Mr. Doucet that carried GST and QST registration numbers, along with receipts signed by Mr. Doucet acknowledging the cash payments he had received.

Cash payments do attract scrutiny, and the Court acknowledged as much. The signed receipts and registered invoices, taken together, satisfied the judge that these were genuine referral fees paid for a business purpose. Those amounts were allowed, and the CRA was directed to reassess accordingly.

Why Family Payments Draw Closer Review

Nothing in the Income Tax Act prohibits paying a family member for legitimate services. The issue is evidentiary.

When you pay an arm’s length third party, the transaction usually generates its own paper: an invoice, a negotiated rate, a payment through a bank, a counterparty with no reason to help you overstate anything. When money moves between spouses who share accounts, a mortgage, and a household budget, that natural documentation trail disappears. The transfer may have happened; distinguishing it from ordinary household spending is the challenge.

That is the gap the Court identified in this case. The referral fee arrangement produced documents on its own. The spousal arrangement did not, and nothing was created after the fact to fill the space.

What Commissioned Employees Should Keep

If you are claiming employment expenses under paragraph 8(1)(f), and particularly if any portion goes to a family member, build the file before the CRA asks for it.

A written agreement. Set out what the person will do, the rate or basis of payment, and when payment is due. Sign and date it at the time the arrangement starts.

A record of the work. Call logs, appointment calendars, lists of prospects contacted, hours worked. Something that shows the service was actually delivered, in a volume consistent with what you paid.

Traceable payment. Pay by cheque or transfer into an account held by that person alone. A withdrawal from a joint account, or a payment toward a shared expense, carries very little evidentiary weight.

Invoices. Have the person invoice you. If they are registered for GST or HST, the registration number on the invoice helps establish that a real business relationship exists.

A link to the income. Connect the expense to the commission it helped generate. Which leads came from this work, which of those closed, and what the resulting commission was.

Reasonableness. Section 67 of the Income Tax Act limits deductions to amounts that are reasonable in the circumstances. Ask whether you would pay an unrelated person the same rate for the same work.

For referral arrangements specifically, the file should show who was referred, which deal closed as a result, and how the fee was determined.

The Two Forms Behind the Claim

Before any of the above matters, two forms have to be in place.

Your employer completes Form T2200, Declaration of Conditions of Employment. This is the document confirming that you were required to pay your own expenses, that you earned commission income, and that you were ordinarily required to work away from the employer’s place of business. Without a signed T2200 on file, the deduction has no starting point regardless of how good your records are.

You then report the amounts on Form T777, Statement of Employment Expenses, which is filed with your T1 return.

Neither form is submitted with the return in most cases; both have to be produced on request. A CRA review typically opens by asking for the T2200 and the supporting receipts behind the T777 figures.

The Practical Takeaway

The outcome in this case did not turn on whether the work was performed. It turned on what could be shown to the Court. The taxpayer’s own explanation of the arrangement, offered years later, did not carry the spousal claim. Invoices and signed receipts carried the referral claim, even though the payments were made in cash.

The lesson for commissioned salespeople is that the deduction is only as good as the record supporting it, and the record has to be built while the arrangement is running.

How Cloudiverse CPAs Can Help

At Cloudiverse CPAs in Burnaby, we act like your Google Maps for income tax; we take a look at where you are, where you want to end up, and lay out the route in between. We work with individuals and small business owners on CRA reviews and audits, employment expense claims, and personal and corporate tax planning.

If you claim employment expenses, or you pay a family member for help earning your income, we can review your documentation and tell you where the gaps are while there is still time to close them.

Book a free 30-minute discovery call: https://www.cloudiverse.ca/book-a-free-30-minute-discovery-call/

Email: aman@cloudiverse.ca Phone: 604-200-4027

References

 

This article is provided for general educational and informational purposes only. It does not constitute tax, legal, accounting, or other professional advice, and it should not be relied on as such.

The discussion above summarizes a published decision of the Tax Court of Canada. It reflects the facts and reasoning as set out in that decision and is a condensed summary rather than a complete account. Readers who need the full reasoning should review the decision itself through the link provided above.

Tax outcomes depend on the specific facts and circumstances of each situation. Tax legislation, CRA administrative positions, and case law change over time, and the content here reflects the law as understood at the date of publication. No assurance is given that it remains current.

Reading this article, watching the accompanying video, or contacting Cloudiverse CPAs Inc. does not create a professional relationship. Cloudiverse CPAs Inc. accepts no liability for any action taken or not taken in reliance on this content.

Please consult a qualified professional regarding your own circumstances before making any decision.