Recently, the Canada Revenue Agency (CRA) released an Interpretation Ruling on this issue which somewhat clarified their assessing position but did absolutely nothing to bring their assessing practice in line with cell phone usage in the 21st century. In the past few years, I have seen assessments that are all over the map ranging from a few that are favourable to the taxpayer, to the majority that typically deny everything and leave it to the taxpayer to determine whether it is worth their while to challenge the assessment. Hopefully the recent ruling will at least serve to guide the CRA auditors to assess in a more consistent manner.
Make sure the T2200 reflects your situation
The first rule regarding the deductibility of any expense from employment income is that you must be required by your employer to pay for that expense. Simply incurring an expense in the course of your employment duties is not sufficient. The form that outlines what expenses you are required to pay is the T2200, which must be completed and signed by your employer. The form must specifically mention that the employee is required pay for his own cell phone costs (as opposed to the more common “miscellaneous office expenses”) or all deductions will be denied on review.
Apportionment of the cost of your basic plan
One important clarification that was made in the Ruling was that assuming you can substantiate business usage, you should then be able to deduct a pro-rata portion of the base plan. Many of the assessments that I have seen claim that you should only be able to deduct specific minute charges for business calls in excess of your basic plan, which dates back to the days when most cell plans charged for every call (and is completely out of touch with today’s cell plans).
Evidence of business use – the big challenge
The problem arises when we see what the CRA views as acceptable evidence of business use vs. personal use. Essentially their position is that the number of minutes used for business vs. personal calls is the only acceptable criteria. For those of us that are on their cell phones constantly, trying to actually calculate this is likely not worth the tax deduction, which leaves you with making an estimate. Keep in mind however that the likelihood of having employment expenses reviewed these days us very high, so there is a good chance you will need to substantiate this estimate.
What about data?
Cell phone providers do not provide a detailed breakdown of data transmissions (I’m not sure this would be even technically feasible). The CRA’s view is “that without a detailed breakdown, an employee would not be able to substantiate the amount of cellular data that was used for employment purposes. Where the data and costs cannot be substantiated, a deduction from employment income is not permitted under subparagraph 8(1)(i)(iii) of the Act.”
What to do if you have significant cell phone costs?
If you are in a situation where you have significant cell phone costs for your work, my first suggestion is to try to convince your employer to pay for your cell phone. If this is not an option, you may want to consider getting a separate cell phone exclusively for employment use, though according to the Ruling, you may still not be able to deduct the data portion of your plan. I have also seen assessments where the deductibility of separate work phones were challenged on the basis that the use of a separate phone was not “reasonable”.
The CRA is aggressively going after employment expenses in general, because in their view there is a lot of abuse in this area. While my view is that many of the CRA’s assessments regarding cell phones would be thrown out in Tax Court, this is not really an economically viable route for most taxpayers to follow for the amounts in question. In the meantime, the best you can do is to ensure that you are as compliant as possible with the CRA’s assessing requirements.