Commission Expenses Must Stay in Current Year, Tax Court Confirms

Introduction‍

If your business relies on commissioned employees, you’ve probably heard questions like, “Can I move my expenses to next year, when my commission is higher?” or "What if I delay submitting my expense report until my commission improves?"

A recent Tax Court of Canada decision (Jan 2025), Rosen v. The King, clarifies how strict the rules really are for deducting employment expenses—and why timing matters. While the case directly involved the individual employee (Mr. Rosen), there are important takeaways for employers who want to ensure their teams stay compliant and avoid potential issues.

Case in Brief

• Who? Lewis Rosen, worked on commission in 2012 and 2013.
• What Happened? He paid personally for substantial promotional expenses in 2012, but didn’t earn enough commission income that same year to fully benefit from them. He then tried to claim the expenses in 2013 (you're now allowed to do that).
• Court’s Decision: Under section 8(1)(f) of the Income Tax Act, employees must deduct expenses in the same year they’re paid. There’s no allowance to carry them forward and offset them against next year’s commission.

Why Does This Matter for Employers?

1. Preventing Misconceptions Among Your Team
   If your commissioned employees misunderstand the timing rules, they might overestimate their tax deductions (thinking they'll be getting more money back at the end of the year). That mismatch can create a real disappointment (and financial risk) when they learn they can’t claim prior-year expenses in a future year.
2. Protecting Your Organization
   While it’s the employee who faces disallowed deductions, misunderstandings can cause compliance headaches. Employers benefit from a well-informed workforce—especially when it comes to how commission expenses are handled. The last thing you want is frustrated employees who feel blindsided at tax time, or worse, tax returns that raise red flags because someone didn't understand the rules.
3. Aligning HR & Accounting
   If you’re reimbursing or partially covering expenses, clarity is key. Your HR or finance team can communicate policies clearly, ensuring employees know which expenses are reimbursable (and how) within each fiscal year.

Key Takeaways from Rosen v. The King

• No Expense Carryforward for Employees
  Unlike a self-employed individual who might carry forward a net loss to a future year, commissioned employees can't do that. If they incur high expenses in a low-income year, the “extra” deduction is essentially lost.
• Legal Structure Matters
  Some roles that appear commission-based might actually qualify as self-employment under certain conditions. That said, it’s a complex determination. If one of your team members truly functions as an independent contractor, they may have different tax filing rules. But if they’re an employee under law, the strict rules from this case apply.
• Focus on Accurate Timing
  Since these rules are applied on a “cash basis” for employees, the date of payment is crucial. An employee can’t just claim an expense in a later year when it’s more beneficial. This needs to be clearly communicated and taken into account when employees time large promotional or travel costs.

Tips for Employers

1. Employee Education
   • Provide clarity on how commission income and expense deductions work.
   • Consider hosting a short workshop or sharing an internal memo explaining that employees cannot push unclaimed expenses forward (also show them what they can deduct)
2. Year-End Planning
   • Encourage employees to track commission forecasts alongside upcoming expenses.
   • In some cases, adjusting the timing of certain purchases to match higher commission income (within reason and the normal course of business) can help employees maximize deductions properly—if the nature of your industry allows for it.
3. Software & Systems
   • Encourage employees to track their expenses clearly in a system with data extraction and reporting by year.
   • Proper forecasting tools help employees see when their commission payouts peak, enabling better alignment of expenses.
4. Evaluate Employment vs. Contractor
   • Some staff might actually fit an independent contractor model (but only if it’s legally and factually accurate).
   • True contractors can benefit from more flexible expense rules, but improper classification can bring legal and tax repercussions for your company.

Final Thoughts

For employers with a commissioned workforce, Rosen v. The King underscores a fundamental principle: employees cannot shift their expenses to a more profitable year. By proactively sharing this information, structuring reimbursements carefully, and investing in the right technologies, you’ll help your team avoid unpleasant surprises and keep your organization on solid ground.

Disclaimer: This blog post provides general information, not specific tax or legal advice. Always consult with a qualified professional for advice tailored to your business.

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