Many Canadians have a place set aside in a den or family room where they can do some office work. With a computer, printer, desk and phone, it might even look like an office. But a taxpayer's ability to deduct expenses for a personal workspace depends on whether the Canada Revenue Agency considers it to be a legitimate home office.
Home office deductions can provide substantial relief at tax time, one that 762,210 taxfilers took advantage of in the 2013 tax year — not including those who submitted manually completed paper returns, which are not included in the CRA's data on home office claims.
So, it's well worth exploring the issue with a tax professional to see if your home office qualifies.
The first thing one notices after reading the tax rules is that the range of deductible expenses varies depending on what kind of worker you are. If you're an employee, your deductions are much more limited than if you're self-employed.
If you're an employee
Saying you like to work from home isn't enough to earn the right to deduct home office expenses. As an employee, you can only deduct office expenses if your employer requires you to maintain an office at home.
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Your employer must also sign a T2200 federal form that certifies this. If the company won't sign, you can't claim.
The home office must also satisfy one of two conditions:
- The workspace must be where you "principally perform the duties of employment." Principally means more than 50 per cent of the time.
- Failing the first condition, the workspace must be used only to earn employment income, and you must use it on a regular and continuing basis to meet clients or customers.
"So, an appointment log is important in that case," advises tax author Evelyn Jacks, president of Winnipeg-based Knowledge Bureau.
Because of the strict conditions, most employees won't be able to qualify.
Tip for employees
If you claim home office expenses, you may also be able to claim a GST/HST rebate for the portion of your home expenses attributable to the employment activity.
To qualify, your employer must be a GST/HST registrant other than a listed financial institution such as a bank, insurance company or brokerage firm.
Source: Grant Thornton's Tax Planning Guide
For those employees who do manage to satisfy the rules, the list of what can and can't be deducted is quite specific.
Essentially, employees can only deduct a percentage of the cost of maintaining the workspace, such as the cost of heating, electricity, minor repairs and cleaning.
"Usually, this is done by comparing the amount of space in the home used to generate income to the entire home size," says Victoria-based chartered accountant James Gustafson. "For mixed-use space, a second pro-ration may be required based on the number of hours per day the space is used for business activity."
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.
If you're self-employed
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 costs (but not the part of the mortgage payment that is a repayment of principal).
Home office claims
The number of Canadians who claimed home office expenses for the 2013 tax year was 762,210. This includes returns printed using a software package (showing a barcode) as well as all returns submitted via Efile, Netfile and Telefile, but the tally does not include manually completed paper returns because detailed business expenses are not captured at the time of assessment.
Source: Canada Revenue Agency
A separate business phone line would be completely deductible.
"You will need to keep receipts on file," KPMG advises. "Do not simply estimate your expenses."
Self-employed workers are also able to claim capital cost allowance (also known as depreciation) on the home office portion of their home. But experts say they shouldn't.
"Don't claim depreciation because you will lose some capital gains protection from the principal residence exemption [when it comes time to sell your home]," warns Gena Katz, executive director at Ernst & Young.
In addition to all the above conditions that must be met, there are a couple of general rules 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 specifically 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.