Annual Income Tax Supplement
Advisors' Federal Income Tax Returns (2011)
This bulletin is designed to help Advocis members file their own income tax returns. It
has been updated for the 2011 taxation year. Revisions to the tax information in this
year's bulletin have been underlined for easier identification. The bulletin covers the
income tax treatment of common "business" activities of an insurance and financial
advisor. As individual taxpayers, advisors will also have other inclusions, deductions,
credits and so forth. Each advisor is responsible for ensuring complete and accurate
reporting of all income tax-related items on his or her own individual income tax return.
Preparation
Advocis suggests you review this bulletin and obtain the appropriate Canada Revenue
Agency (CRA) guides, forms and interpretation bulletins (referred to by their IT
numbers) before you begin preparing your income tax return. Especially helpful are the
tax guides entitled Employment Expenses (T4044) (for employees) and Business and
Professional Income (T4002) (for self-employed individuals). Most tax guides are
revised every year; use up-to-date guides only. CRA publications can be obtained free of
charge from tax services offices (in person or by telephone) or from the CRA website at
www.cra.gc.ca.
The CRA mails out income tax packages, including personalized identification labels, to
taxpayers who filed returns for the previous year. You must file a T1 General return if
you are reporting commission income or claiming employment or business expenses.
You can get both the 2011 T1 General Forms package (customized for your province)
and the General Income Tax and Benefit Guide 2011 from a post office or tax services
office.
General rules
Your tax treatment depends on whether you are an employee or are self-employed, and
on whether you receive commission income.
Employed/self-employed determination
The initial responsibility for determining the nature of your relationship rests upon you
and the company(ies) you represent. The CRA issues a guide entitled Employee or SelfEmployed? (RC4110) that sets out factors to be considered. Note that the same status will
apply for income tax, Canada Pension Plan and Employment Insurance purposes. Where
a question or dispute arises, you may request a ruling on the status of your relationship
from the CRA.
Also note that an advisor may be employed by one financial institution and maintain a
self-employed relationship with another institution.
Employed advisors
As an employed advisor, you earn employment income. In order to claim expenses, both
you and your employer must complete Form T2200 (Declaration of Conditions of
Employment). This form must show that you are normally required to carry on your
employment duties away from your employer's place of business and that you are
required under your employment agreement to pay your own expenses. Form T2200 need
not be submitted with your return, but you must complete a new one each year and keep
it on file. Form T777 (Statement of Employment Expenses) must be filed with your
return. The Employment Expenses guide contains both forms. You can also print them
directly from the CRA website.
As an employee, you must generally file your income tax return for the prior year by
April 30. If your spouse or common-law partner is self-employed, however, your filing
deadline is June 15. Any tax owing must be paid by April 30 to avoid interest charges.
The amount of an expenditure includes any sales taxes you paid. The types and amount of
expenses you can claim depend in part upon whether you receive commission income.
Salary-only advisors: As an employee who does not receive commission income, you
are generally entitled to deduct the expenses listed under items 1 to 7 below. However, if
you receive a non-taxable allowance for motor vehicle expenses or for travelling
expenses, you cannot claim the respective deductions under items 1 to 3.
Commissioned advisors: As an employee who receives commissions (either alone or in
combination with salary), you are entitled to deduct the amounts listed in items 1 to 21 on
the next page. However, if you receive a non-taxable allowance for motor vehicle
expenses or for travelling expenses, you cannot claim the respective deductions under
items 1 to 3. Note that the total amount deducted under items 2 to 21 must not exceed
your commission income for the year.
If the total of items 2 to 21 does exceed your commission income, it might be better to
claim the deductions available to employees generally. You may then claim only the
expenses available to non-commissioned employees (i.e., items 1 to 7 as described
above), but your claim is not limited to the amount of your commission income. See the
Employment Expenses guide for an example.
Self-employed advisors
As a self-employed advisor, you earn business income. The CRA encourages you to file
Form T2125 (Statement of Business Activities) with your return. This form is included in
the Business and Professional Income guide. It can also be printed from the CRA
website. Self-employed individuals have until June 15 to file their income tax returns for
the prior year. However, any tax balance owing for that prior year must be paid by April
30 to avoid interest charges.
Self-employed advisors are eligible to claim all of the applicable expenses listed in items
1 to 28 on the next page. The amounts expended will include sales taxes, except to the
extent you have claimed input tax credits on your expenditures.
Deductible items
Regardless of your employment status, a few general rules apply to all expense claims.
o
o
o
You must have spent the amount (and not been reimbursed for it) for the
purpose of earning commissions or other income.
The amount must be reasonable in the circumstances.
You must keep proof of the expenditure (see "Keeping records").
The following list of deductible items is general in nature. Consult the relevant CRA
guides and interpretation bulletins for additional information. There may be restrictions
and requirements specific to your circumstances.
All financial advisors, whether they are self-employed, or salaried or commissioned
employees, may deduct the following:
1. Interest on a loan to purchase, and depreciation on, an automobile used for business
purposes. Keep a record of the distance travelled for business purposes (excluding
driving between your home and office) and the total distance travelled for the year. Only
the business-use portion of the following amounts is deductible:
•
•
interest paid on money borrowed to acquire the automobile, up to a
maximum of $10 per day for vehicles acquired after 2000. The limit is
$8.33 for vehicles acquired after 1996 and before 2001; and
capital cost allowance (depreciation), calculated as explained in the
Employment Expenses or Business and Professional Income guides. The
depreciable cost of an automobile acquired after 2000 is limited to
$30,000, plus sales taxes on $30,000.
Deduction limits for vehicles acquired prior to the dates noted above are shown in the tax
guides.
2. Other expenses related to the operation of an automobile, including the business-use
portions of:
•
•
automobile lease charges (generally) of up to $800 (plus sales taxes) per
month for vehicles leased after 2000. The limit is $700 (plus sales taxes)
for leases entered into in 2000 and $650 (plus sales taxes) for leases
entered into in 1998 or 1999;
operating expenses, such as for fuel, oil, tires, car washes, insurance
premiums, licences, maintenance, repairs and short-term rentals; and
•
the cost of parking for business purposes. This includes parking at the
office for travelling advisors, but not for those who mostly work at the
office and are not required to travel.
Keep a complete record of all expenses connected with your car, fully itemized and with
receipts. Records of business and total use should also be maintained. For more
automobile expense information, see the guides mentioned above and IT-521R (if you are
self-employed) or IT-522R (for employees).
3. All necessary business travelling expenses, including city transportation. Obtain
receipts for hotel, airplane, train, boat, bus and taxi fares. The cost of travelling between
your home and office cannot be deducted. Travelling expenses include 50 per cent of the
cost of meals eaten while you were required by your duties to be away, for at least 12
hours, from the office's municipality and its metropolitan area. List automobile expenses
separately (see 1 and 2 above).
4. Any expenses for office rent and office supplies (such as stationery, postage, business
cards, printer paper and ink, street maps and directories) that you are required to pay.
Business-related long distance and cellular telephone airtime charges are also deductible.
5. Any salary you are required to pay to an employee and any Canada/Quebec Pension
Plan or Employment Insurance premium you are required to pay on behalf of your
employee. (Guides and forms for the remittance of payroll deductions and T4 returns are
available at your tax services office.)
6. Legal fees paid in establishing a right to, or in collecting, salary owed to you (IT-99R5
(Consolidated)).
7. Expenses relating to your home office, provided that it is your principal place of
business or that it is used exclusively for earning income and is used on a regular and
continuous basis for meeting clients (IT-352R2). Eligible expenses include the businessuse portion of rent, heating, electricity, cleaning materials and minor repairs. For any
year, the total deduction for your home office expenses cannot exceed the income related
to those expenses.
In addition, commissioned employees and self-employed advisors may also deduct:
8. The business-use portion of the leasing costs for equipment such as computers, cellular
telephones, fax machines, photocopiers, etc. You may also deduct the basic monthly
service charges for dedicated office telephone, Internet and e-mail services.
9. Legal and accounting fees related to earning income, including amounts related to
establishing a right to or collecting commissions, and fees for preparing tax returns and
appealing tax assessments. Various conditions apply (IT-99R5 (Consolidated)).
10. A reasonable portion of the property taxes and insurance premiums related to a home
office. These expenses form part of the total home office expenses that are subject to the
conditions and limits outlined in 7.
11. Business meal and entertainment expenses. Fifty per cent of the cost of business
meals consumed and entertainment enjoyed is deductible. No deduction is allowed for
membership fees or dues in any club whose main purpose is to provide dining,
recreational or sporting facilities for its members. Expenses of a capital or social nature
will also not qualify (IT-518R).
12. Commissions paid to an individual who is not your employee. No tax deduction,
Canada/Quebec Pension Plan deduction or contribution or Employment Insurance
deduction or contribution is required for such payments. Where amounts paid to an
individual total $500 or more or where tax has been deducted at source, a form T4A must
be prepared. The CRA guide Deducting Income Tax on Pension and Other Income, and
Filing the T4A Slip and Summary Form (RC4157) includes pertinent information.
13. Commissions on insurance policies acquired for personal protection that you own and
are obligated to pay for, provided that these commissions have been reported as income
during the taxation year (IT-470R, paragraph 27). In the CRA's opinion, commissions on
policies purchased for investment purposes, including annuity contracts and, more
specifically, segregated fund contracts, are not deductible. Commissions on policies
owned by a corporation are not deductible. If your agency is incorporated, and corporate
documents stipulate that you are entitled to receive the commissions on your own
personal-protection policies on a flow-through basis, then the commissions will be
deductible to you personally. Any life insurance commissions deducted will reduce the
adjusted cost basis of the related policy. [Claim the deduction on line 232 of the T1
General return.] Please note this item is in accordance with the CRA’s longstanding
administrative position, as the deductibility of these expenses is not specifically
mentioned within the Income Tax Act.
14. Provincial licence fees and bond premiums.
15. Professional association membership fees, including Advocis, The Institute, CALU,
FPSC and MDRT (IT-211R).
16. Subscriptions to magazines and other informational material relating to your work.
17. Any medical or underwriting fees, including fees for X-rays, heart charts or sugar
tolerance tests, connected with the underwriting of client risks and actually paid by you.
18. Advertising and promotional expenses.
19. Premiums for errors and omissions liability insurance.
20. Training and related expenses (including the cost of travel and lodging and the
deductible portion of meals) you paid to maintain, update or upgrade skills or business
and professional expertise (IT-357R2).
21. Other reasonable expenses related to earning commissions, other than those
deductions available only to self-employed financial advisors (see 22 to 28 below).
The following additional deductions are available to advisors who earn income from selfemployment:
22. A reasonable portion of the capital cost allowance and mortgage interest payments
related to a home office. These expenses form part of the total home office expenses that
are subject to the conditions and limits outlined in 7 above (IT-514). Note that the
principal residence protection from capital gains does not apply to a work space for
which capital cost allowance has been claimed. See the current version of IT-120R6,
Principal Residence, for more information.
23. Bad debts incurred in financing premiums for clients, provided this is done in the
ordinary course of business. Any amount subsequently recovered must be included as
income when received.
24. Expenses you paid to attend up to two conventions related to your business. Such
conventions must be held at a location reasonably consistent with the territorial scope of
the organization. Conventions held in the United States by national Canadian
organizations qualify for deduction. Where the fee for a convention does not segregate
the charge for meals and entertainment, that charge is deemed to be $50 per day and, in
accordance with the limits on such expenses, $25 per day will not be deductible (IT131R2).
25. Capital cost allowance claimed for the business use of a computer or other capital
equipment. Eligible capital property allowance related to expenditures on goodwill and
other intangible capital business assets. For computer hardware and software (CCA class
52), there is a temporary 100% rate applying to purchases made after January 27, 2009 up
to the end of January 2011.
26. Premiums for coverage under a private health services plan (PHSP) for yourself, your
spouse or common-law partner and other household members. The rules and limits for
this deduction are set out in the Business and Professional Income guide.
27. One-half of your Canada/Quebec Pension Plan contributions on self-employed
earnings. (The other half qualifies for the CPP/QPP tax credit.) The deduction is
calculated on Schedule 8 and claimed on line 222 of the T1 General return.
28. Other reasonable expenses related to earning business income.
Tax credits available to advisors
Employed and self-employed advisors may claim a tax credit for tuition fees paid for the
LLQP, CFP, CLU and RHU courses, CLU seminars and life insurance schools conducted
by Advocis, provided such fees exceed $100 for the year. Other courses may similarly
qualify. You should receive Form T2202A (Tuition and Education Amounts Certificate)
for qualifying courses. The federal tax credit is 15 per cent of the fees paid. You may not
claim this credit if such fees are paid on your behalf by your employer and are not
included in computing your income (IT-470R, under "Employer-paid educational costs,"
and IT-516R2).
In addition, you may be eligible to claim the textbook and part-time education tax credit
at the federal credit rate of 15 per cent of $20 (for the textbook amount) and $120 (for the
education amount) multiplied by the number of months of enrolment at a designated
educational institution in a specified educational program. This information will be noted
on Form T2202A for such courses.
Contributions under new Employment Insurance (EI) measures for self-employed
individuals (in effect since January 2010) are also eligible for a federal tax credit.
Beginning January 2011, self-employed individuals can choose to pay EI premiums to be
eligible to receive EI special benefits. For more information, consult the “Employment
Insurance Special Benefits for Self-Employed People” topic on the Service Canada
website.
Keeping records
The CRA requires reasonable proof for all income and expenses.
Income: Keep an accurate running record of all income. The record should be clear and
should reconcile to your income tax return. It should show all income earned during the
year (net of chargebacks) by way of salary, fees, commissions, bonuses, allowances
received to cover expenses and any other income earned as a financial advisor, including
any amounts that are paid to you as advances against commissions.
Expenses: Your record of expenses should clearly show that items have been entered
concurrently with the expenditures. Each item should show not only the nature of the
expense, but also its purpose — namely, that it was a necessary expense connected with
earning the reported income. Obtain receipts wherever possible to support the amounts
spent.
You can obtain suitable expense record books from any business supply store for desk or
pocket use; computer-based expense tracking programs are also available. Enter expense
items at the end of each day and keep the records for tabulation at the end of the year and
for inspection by the CRA if necessary. Remember that the tax assessor may request
actual receipts to support expenses claimed and that tax records must be maintained for at
least six years.
Appealing assessments
If the CRA disallows any of the items you have deducted and you feel the assessment is
incorrect, you may contact the CRA office that issued the assessment to request
clarification or correction. If the response is not satisfactory, you may file a Notice of
Objection with the CRA within 90 days of the mailing of the Notice of Assessment or
within one year of the due date of the return, whichever is later. If the CRA's decision is
not in your favour, you may appeal to the Tax Court of Canada.
Compiled by Advocis and issued for the use of its members in March 2012. This
information has been updated with the assistance of the Invesco Canada Tax & Estate
InfoService and Doug Carroll, vice-president, tax & estate planning, Invesco Canada
Ltd. While Advocis makes every effort to ensure accuracy, this bulletin cannot cover all
situations nor does it have authority in law.
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