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Can the cost of luxury clothing, when worn to work by an employee of a high-end fashion store, be a valid tax-deductible employment expense? That was the issue before the tax court in a recent case heard last month.

The taxpayer worked for

Holt Renfrew

from 1994 to 2019 as a designated sales associate, and a brand specialist for

Judith and Charles

. In her 2016, 2017 and 2018 taxation years, she deducted the cost of luxury clothing and various home office expenses. The issue before the court was whether she was required to incur those expenses as a condition of her employment.

The Holts dress code required a “well-groomed and businesslike appearance” to establish credibility with customers. The taxpayer was expected to be entrepreneurial, competitive and self-motivated and to deliver extraordinary customer service.

Promoting the brands by wearing their products was important to achieving sales targets, and the taxpayer achieved “Silver Elite” status for five consecutive years, meaning having at least $1 million of sales at the Bloor Street, Toronto location. The taxpayer was partly compensated by way of commissions on sales.

The taxpayer testified that the specialist designated sales associate program obligated her to wear vendors’ brands, to achieve and exceed sales criteria. The specialist program document submitted into evidence included, among other things, expectations to meet sales targets, including demonstrating entrepreneurial initiative and leadership, and using their clothing allowance to wear and promote the products they represent.

To this end, the taxpayer received a clothing allowance of $2,000 per season, for each of the two fashion seasons each year. She was able to purchase regularly priced items at half price, so the retail price equivalent of her annual clothing reimbursement was $8,000. She could also buy items that were on sale with a further one-third price reduction, but the new stock was never on sale at the start of the season, so there was little incentive to purchase sale items since they would be out-of-date.

The taxpayer maintained that she had to purchase additional clothing at her own expense, which she said she wore exclusively for work, because she felt that the clothing allowance was “inadequate.” The taxpayer believed that purchasing and wearing additional high-end clothing for work would help her achieve greater commission income.

She testified that she purchased and used high-end clothes for work only, and that wear and tear throughout a sales season depleted the items. She explained that her workdays involved regularly going up flights of stairs and into an attic storeroom, and that it was possible “to hitch clothes on edges in the storeroom and on the metal staircases.” She said that damaged clothes could not be reused, and that the clothes would not be reusable year-over-year because styles change, and she needed to remain “current.”

On top of the clothing allowance, the taxpayer was reimbursed by Holts for bona fide employment-related expenses, including monthly cell phone costs, taxi costs, and meals and accommodation if travelling for work, for example, to seasonal product knowledge events.

The

Canada Revenue Agency

denied the taxpayer’s clothing expenses, saying they were not deductible as they were personal expenditures. When the taxpayer was audited, she tried to get signed

Form T2200 “Declaration of Conditions of Employment”

from Holts for each of the taxation years under review. The company refused to provide these forms because, in its view, she was not required to incur expenses as a condition of employment. She was told that company policy was against issuing T2200 forms to employees and further, if they were to issue her T2200s, they would not confirm any obligation to incur employment expenses.

The issue before the court was whether the taxpayer was required, as a condition of her employment, to incur the expenses. The courts have found in prior cases that this requirement may be an express or implied condition of employment.

While the judge found the taxpayer to be “credible and forthright,” adding that when asked a question to which she didn’t know the answer, she admitted it, and “did not attempt to obfuscate or engage in prolix meandering,” nonetheless, the evidence submitted at trial simply did not support any requirement by Holts for her to buy clothes, at her own expense, as a condition of her employment.

The judge even considered whether incurring employment expenses was an “implicit criterion of employment.” This can be the case where an employee might receive a negative performance evaluation, or any disciplinary action, for failing to take certain steps and incur related expenses. In the present case, there was no evidence concerning the taxpayer’s clothing that would support an implicit requirement argument based on any adverse steps that Holts may have taken or threatened.

The judge noted that while “it may have been smart for (the taxpayer) to choose to incur expenses on her own account, over and above her allowance, to help her earn more commissions … making a smart economic choice and being contractually obligated (even implicitly) are different.”

Since there was no express nor implied term of employment that required the taxpayer to incur the additional clothing expenses, the judge found them to be non-deductible.

As for her home office expenses, the Tax Act

limits the deduction of home office expenses

unless the home office is the place where the taxpayer principally performs their duties, or the space is used exclusively for work and on a regular and continuous basis for meeting customers or other persons related to work.

The taxpayer testified that she worked unpaid hours at home to keep up with client matters, making calls and dealing with reports. For example, on one occasion, she answered a call in the middle of the night about delivering a belt before a client’s 7 a.m. flight. There was, however, no contractual requirement that the taxpayer work after regular working hours, and any overtime worked was subject to pre-approval.

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The judge concluded that since the taxpayer did not principally perform her duties from home, nor did she use the space regularly for meeting customers or others in the ordinary course of her work, her home office expenses were not deductible.

Jamie.Golombek@cibc.com

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.