Employees who are shareholders

When you are an employee and also a shareholder of a business, there are two conditions that must be satisfied before employment expenses can be claimed. They are:

• The expenses were incurred as part of your employment duties, and;
• You were required to pay for the expenses yourself as part of your employment duties.

When an employee is also a shareholder, these two conditions can be satisfied in the following way:

• The expenses were incurred as part of your employment duties, not in your capacity as a shareholder.
  

  If you are a shareholder, you must establish that the expenses were incurred in your capacity as an employee and not a shareholder. To do this, you must be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company, or at other businesses similar to your company in size, industry and services provided. You do not need to include this information on your income tax and benefit return or the Form T2200 Declaration of Conditions of Employment, however, the CRA could ask you to provide this later.

• You were required to pay for the expenses yourself as part of your employment duties.Usually, a written contract of employment specifies the expenses a non-shareholder employee must pay. Sometimes there is no written contract or the requirement to incur expenses is not clearly identified in the contract, but there is an implied requirement for the employee to pay the expenses.  For example, an employee can demonstrate an implied requirement by showing they face possible disciplinary action if they do not meet the requirement.

If you are a shareholder-employee however, an implied requirement may be more difficult to demonstrate and a written contract may not be adequate to establish that you were required to pay for the expenses as part of your employment duties.

To satisfy this condition, you must be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company, or at other businesses similar to your company in size, industry and services provided. This will support that you were required to pay the expenses to fulfill your obligations in your capacity as an employee.

You must satisfy both conditions to deduct the expense(s) on the income tax and benefit return. If both conditions are met, you may, as a shareholder, have the authority to certify Form T2200, Declaration of Conditions of Employment, for yourself or a related employee.