Understand Employment Income and What Can Be Deducted
Understand what the CRA considers taxable employment income, what work-related expenses you can legally deduct, and how to make the most of your annual tax return
For most Canadians, employment income is the foundation of their financial life. It’s how bills are paid, savings are built, and long-term goals are pursued. Yet few people fully understand what counts as employment income under the tax rules—or what deductions may be available to reduce the amount of income that is taxed.
This matters when you are reviewing your T4 slip, deciding whether to claim home office expenses, or preparing for a year with commission or bonus income. Knowing how employment income is defined and what deductions apply can help you make better choices and keep more of what you earn.
What Is Considered Employment Income?
Employment income includes more than just your salary or hourly wages. The Canada Revenue Agency (CRA) defines employment income broadly, capturing a variety of payments you may receive through your job.
Examples of employment income include:
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Regular salary or hourly wages
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Bonuses and commissions
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Gratuities and tips (if controlled or reported by your employer)
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Taxable benefits, such as employer-paid life insurance or parking
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Allowances and reimbursements, such as car or travel allowances
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Honoraria, director’s fees, or signing bonuses
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Employer-paid RRSP or pension contributions (in certain situations)
In short, if it is received because of your employment, it is generally considered taxable income unless specifically exempted.
Understanding Taxable Benefits
Many non-cash perks are still considered taxable. If your employer provides you with housing, a vehicle, tuition, or even financial counselling, the value of those benefits may be included in your income. These amounts are often reported on your T4 slip.
Important: Not all benefits are taxable. Group health premiums, certain employee discounts, and in some cases meals or uniforms may be exempt. We can help you interpret your pay stub or year-end slips to clarify what is included.
What Deductions Are Available Against Employment Income?
Unlike self-employed individuals, employees have limited deductions they can claim against employment income. However, there are still several valuable options that can reduce your taxable income if the conditions are met.
Common Deductible Employment Expenses
Below is a summary of deductions that may apply if you are required to pay certain expenses to earn your employment income:
| Deductible Expense | Who It Applies To | Conditions to Claim |
|---|---|---|
| Home Office Expenses | Employees working from home | Must work from home over 50% of the time and have form T2200 |
| Motor Vehicle Expenses | Employees who travel for work (excluding commuting) | Must be required to use your own vehicle and have form T2200 |
| Supplies & Equipment | Teachers, commission employees, certain professionals | Must be required by contract and not reimbursed |
| Meals & Entertainment (50% deductible) | Commission employees | Must be directly related to earning income |
| Legal Fees | Employees paying to collect or establish salary or wages | Certain legal fees related to employment may be deductible |
| Union or Professional Dues | Most employees in regulated or unionized professions | Dues must be required to maintain employment |
| Office Rent or Workspace Rent | Commission employees renting dedicated workspace | Must meet CRA workspace criteria and keep detailed records |
Some deductions are only available to commission-based employees, while others may apply more broadly if specific conditions are met. You generally need a T2200 Declaration of Conditions of Employment from your employer to claim these deductions, especially for home office and vehicle expenses.
When and How to Claim These Deductions
You claim employment-related deductions on your personal tax return, using forms like T777 (Statement of Employment Expenses) or T777S (for simplified home office claims). It is essential to keep detailed receipts, mileage logs, and employer documentation in case the CRA requests verification.
At Optimize, we help you assess whether you qualify for any employment-related deductions and guide you through the documentation needed to support your claim. We also review your income mix to ensure your benefits and allowances are reported correctly and aligned with your tax plan.