Considering deductions in more detail, their basis is s. 9(1) of the Income Tax Act, with exclusions provided elsewhere in the Act. Section 9(1) defines profit which courts have assessed as a net concept. Given that the term profit includes deductibility, whether an amount is deductible is first considered from the standpoint of commercial and accounting practices.

If it is deductible from that standpoint, then s. 18(1) is used to determine whether a deduction is otherwise excluded by the Act. In a nutshell, no deduction should be made in computing a taxpayer’s income from a business or property, except “…to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.” The test to determine whether a deduction is disallowed according to s. 18(1)(a), is whether it was incurred outside the process of earning income from a business or property. As such, valid deductions must generally be tied to the operations of an income-earning undertaking.

And while the deduction of personal or living expenses is broadly rejected by s. 18(1)(h) and inferentially by s. 18(1)(a), taxpayers are empowered by the Act to deduct certain childcare expenses. Certain expenses are also deductible by employees, such as home office supplies, and travel, if the employer does not reimburse the employee. However, these expenses must generally be contemplated in the employment contract to be deductible.

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