There are home offices and "home offices," and failing to acknowledge the difference could draw some uncomfortable attention from the Canada Revenue Agency, which is taking a closer look these days at those who work from home.
Entertainment, repairs and "mixed use" expenses such as cars appear to be spending more time under the microscope, as are the forms that employers are required to sign before employees who also work from home are allowed to claim anything, according to Alan Rowell, tax specialist and president of The Accounting Place in Hamilton, Ont.
'CRA is fact-checking. Over the last six months, what we're seeing is CRA is contacting employers to see if they actually signed that (T2200) form.' — Alan Rowell, The Accounting Place
Tax filers who are not self-employed and who wish to claim home office expenses need to get their boss's signature on a T2200 — which confirms that the employee is required to do some work from home.
"But because so much stuff is being done electronically — the form is available on the CRA website — it's easy for the employee to fill it out and send it in [without the employer's knowledge]," said Rowell.
"So, CRA is fact-checking. Over the last six months, what we're seeing is CRA is contacting employers to see if they actually signed that form.
"That's new. In 15 years, I've never run across that until this year."
CRA says no more scrutiny than usual
Even if the story checks out, the CRA might want to take a closer look at the company itself, including why any of its people need to work outside of the office, he says.
"That's happening more and more all the time," Rowell said.
A spokesperson for the CRA, however, says there is "no increased effort" this year to review home office expenses and no change to how it reviews employment expenses or T2200s.
"Employment expenses [are] just one of the many claims that could be subject to review, and there are many different expenses that can be claimed under this deduction which could be subject to further review," the agency said in an email to CBC News.
Evelyn Jacks, financial educator and president of the Winnipeg-based Knowledge Bureau, says the CRA is "vigilant" with home office expenses, an area where both fraud and honest mistakes are common.
"In general, we've found CRA has been more conscientious behind its auditing," she said.
Many Canadians have some sort of desk and computer set up in their homes. But whether you are self-employed or the employee of a company, your ability to claim certain expenses depends on whether the CRA considers that desk to be part of a legitimate home office.
Do basements count?
Usually. The size of one's home office relative to the total size of the home is an important part of the CRA's math. Basements should be included in the calculation, say experts, though non-livable space such as root cellars can be omitted.
"Measure your house and include your basement," says Rowell.
As an employee, you can only deduct office expenses if your employer requires you to maintain an office at home and signs a T2200. Your home office must also satisfy one of two conditions:
- It must be where you "principally" — meaning more than 50 per cent of the time — "perform the duties of employment."
- Or it must be used to generate income independent of that from your other work space, and you must use it on a regular and continuing basis to meet clients or customers.
Tradespeople are often tripped up by that first condition, says Jacks, because the bulk of their work is actually done at job sites.
"If you're someone who's in construction, who's on a site five days out of seven, you don't meet that 50 per cent rule," she said. "That takes a lot of people by surprise."
Likewise, doctors and other professionals who maintain an office at home can run afoul of the second condition unless they can demonstrate that they use it to meet patients or clients.
"So, an appointment log is important in that case," said Jacks.
A space used to catch up on paperwork you didn't get done in the office won't qualify.
Eligible expenses limited
Most employees will not meet these restrictions, and even those who do can only make claims from a very short list of expenses — deducting only a percentage of maintenance costs, such as heating, electricity, minor repairs and cleaning.
Rowell maintains that the CRA is looking "very tightly" at maintenance and repair claims, recalling with a laugh that one of his clients had hoped to claim the installation of a swimming pool.
"Obviously, we didn't put that one through," he said.
A percentage of rental payments can also be deducted. But if you own the home, mortgage interest, property taxes, home insurance and capital cost allowances can't be claimed.
Salespeople on commission are, however, allowed to deduct a prorated portion of their home insurance costs and property taxes.
Self-employed have more options
If you're self-employed, the range of available home office deductions expands dramatically.
In addition to claiming a prorated portion of one's rent, utilities, maintenance and repairs, self-employed workers can also claim a portion of home insurance, property taxes and mortgage interest payments (but not the part that is a repayment of the principal). A separate business phone line would be completely deductible.
Experts urge the self-employed to keep all such receipts on file — including electricity, phone and heating bills.
Self-employed workers are also able to claim capital cost allowance (also known as depreciation) on the home office portion of their home, though experts advise against it, because, when it comes time to sell your home, you will lose some capital gains protection from the principal residence exemption.
In addition to all the above conditions that must be met, there are a couple of general rules to keep in mind about home office expense claims.
For one thing, they can't be used to create or increase a loss from employment. But eligible expenses that can't be claimed one year can be carried forward to future years, as long as you still meet the criteria to claim home office expenses.
The CRA's T2125 form — Statement of Business or Professional Activities — needs to be filled out to claim these expenses. Page 3 of this form deals with the calculation of what are called business-use-of-home expenses.
Most tax software programs will let taxpayers claim home office expenses, although you may want to upgrade to a more expensive version that caters to the self-employed or small-business owners.
Working from home can result in big tax savings. But the rules are strict and the paperwork can be formidable. It might be wise for first-time claimants to seek the help of a professional.