Commission employees in Canada are a specific category of taxpayers under the Income Tax Act. They have the option of deducting a broader range of expenses from their gross income. The sales expenses incurred by a commission employee are only deductible against the commission portion of the employment income and the amount cannot exceed the commission that is received by the taxpayer during the year.
What is commission income?
Commission income is usually a percentage of sales revenues, but it could also be a flat rate based on the sales commission agreement between the owner of a product and the seller of that product. Sharing the earnings means the owner receives less money from each unit, but may actually earn more money overall as a number of people are marketing the product for the owner.
Who qualifies as a commission employee?
Commission employees earn commission income or a combination of salary and commission. At least part of their income is based either on sales or another kind of achievement. To qualify as a commission employee, you must meet all of the following criteria:
- As part of your employment contract, you must cover the cost of your own expenses
- You are normally required to work away from your employer’s place of business
- You are paid a portion or all of your earnings in commissions, based either on volumes of sales or on contacts you negotiated
- You do not receive any non-taxable allowances for travelling, such as a kilometre allowance
- You receive a form T2200, Declaration of Conditions of Employment, annually, which is completed and signed by your employer
Examples of commission jobs/positions:
- Sales engineers: Sales engineers sell advanced technology and/or services to businesses. They may also help in the research and development of these products.
- Wholesale and manufacturing sales representatives sell products to private companies and government agencies. They assist clients in understanding and selecting products, negotiate prices and prepare sales contracts.
- Securities, commodities, and financial services sales agents buy and sell securities (ie: stocks, bonds) and commodities (ie: gold, corn). They monitor financial markets, advise companies and sell securities to individual buyers.
- Advertising sales representatives sell advertising space for online, broadcast, and print media platforms to businesses and individuals. They contact potential clients, maintain customer accounts and make sales presentations.
- Insurance sales agents sell one or more types of insurance (life, health, property, etc.). They contact potential clients, explain the features of policies, help customers choose plans, manage policy renewals and maintain records.
- Travel agents plan, book, and sell travel for individuals and groups. They book transportation, lodging and activities.
- Financial advisors assess the financial needs of individuals to help them make important decisions regarding taxes, insurance and long or short-term investment options. Advisors interface with clients to understand their financial goals, perform financial analyses and calculations and make recommendations for meeting those goals.
- Sales consultants help companies sell products or services to target customers. They meet with clients, conduct research, analyze market statistics, identify existing issues and assess opportunities for strategic intervention. They create marketing strategies to promote products, advise companies on how to best execute their promotional campaigns and are responsible for making recommendations on how to train sales representatives and increase sales within retail locations.
- Brokers facilitate large-scale business transactions. They serve as intermediaries between customers and sellers and are responsible for advising clients on how to make successful business investments regarding real estate, stocks, mutual funds land, insurance and more.
- Sales managers are leading members of sales teams. They provide guidance, mentorship and training for sales representatives and agents. Sales managers are responsible for setting goals, quotas and crafting successful sales plans to meet company targets while staying within budget.
What employers of commission employees need to know:
- If you pay commissions at the same time you pay salary, add this amount to the salary, then use the Payroll Deductions Online Calculator, the Payroll Deductions Formulas (T4127), or the manual calculation method found in Payroll Deductions Tables (T4032).
- If you pay commissions periodically or the amounts fluctuate, you may want to use the bonus method to determine the tax to deduct from the commission payment. See Bonuses, retroactive pay increases or irregular amounts to find out how to do this.
What expenses can a commission employee claim?
There are a variety of expenses that commission employees can claim on Form T777, Statement of Employment Expenses when they file their personal income tax return. Sales expenses are deductible only against the commission portion of an employee’s income.
- accounting fees
- legal fees
- costs for business cards, promotional gifts, cellphones, and computers
- a portion of the costs associated with work-related transportation including fuel, maintenance, insurance, registration fees, parking, and any interest or leasing costs
- 50% of food and beverage costs for themselves (not clients) if they are away from the office for over 12 hours at a time
- Costs of entertaining clients except for golf club and membership fees
- advertising and promotions
- accounting fees
- Capital Cost Allowance
- work space-in-the-home expenses
- home insurance and property taxes when claiming home-office expenses
- salary of an assistant
- parking costs
- licensing fees
- monthly home internet access fees
- office rent
- training costs
How are claims supported?
To support your claims as a commission employee you must keep all receipts, cancelled cheques, invoices, credit card statements and other documentation that supports your claims. Your records must include your name and address, the name and address of the seller, a full description of the product/service purchased and any GST paid on the purchase. Automobile expenses must be supported by a log that shows the total number of kilometres driven for employment purposes through the use of odometer readings.
If your company employs commission workers but you find the rules and regulations regarding payroll and taxes confusing, you’re not alone! Contact your CPA for assistance. They can help you navigate the complexities and assist you with source deduction planning and remittance.
Need help with the tax complexities associated with commission employees? Contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you, making tax time a breeze. Contact us to request a meeting.