In the context of the COVID-19 pandemic, Canadians doing their work at home may have used their home as an office and incurred extra costs accordingly. What expenses will then be tax deductible for them?
The deductibility of expenses for tax purposes — including home office expenses — depends, first of all, on whether you are an employee or self-employed. (Many self-employed people were already claiming home office expenses before the pandemic.)
Employees — Home Office Expenses
If you are an employee, and are required by your contract of employment to maintain an office in your home, you can claim certain home office expenses, but only if you meet certain conditions.
First, your employer must sign a certificate (Form T2200), confirming that the employer requires you to have a home office.
Second, either the home office must be the place where you “principally perform the duties of employment”, or else you must use it on a regular and continuous basis for meeting customers or other people in the ordinary course of your employment.
The effect of the above rules in the past has been that the deduction is rarely available to employees.
However, at time of writing the CRA had not yet indicated whether it may relax these rules for people working at home during the COVID-19 crisis, in a number of possible ways. Many taxpayers may take these positions anyway, forcing the CRA (and if necessary the Tax Court) to decide these issues:
- The determination of “principally perform the duties of employment” has traditionally been based on the amount of time you spend at your home office over the entire year. However, the Income Tax Act is not clear on this point. One can argue that home office expenses should be allowed for the weeks or months during the year that you worked at home, because during that period, that is where you “principally” performed your duties of employment.
- “Meeting” people has been held by the Tax Court of Canada to include telephone meetings, in at least four reported cases. In the past, the CRA has said that it does not accept these decisions. One hopes that, given the extensive use of video conferencing for meetings during the pandemic, the CRA will change its mind on this and stop trying to overrule the Tax Court.
- Form T2200 has traditionally been considered to be required for the entire year (or the part of the year that you are employed by that employer). However, the Income Tax Act is not explicit about this. The CRA (or the Tax Court) might permit the form to apply to only those weeks or months that your employer instructed you to work at home.
If you do qualify to deduct home office expenses, what can you claim?
The allowable expenses are normally based on the fraction of the home that is used for your office. You can choose any calculation which is reasonable; calculations based on square footage or number of rooms are usually reasonable.
The expenses you can claim include:
- rent, if your home is rented — but not mortgage interest or capital cost allowance
- utilities: electricity, heat, water
- maintenance, including repairs and supplies (e.g., lightbulbs)
You can’t claim any expenses that exceed your total employment income from that employer — but if you do have such an excess, it can be carried forward and you can claim it against income from that employer in a later year.
Employees — Other Expenses
The Act also allows a number of other expenses that can relate to you working at home — again, only if required by your employer as certified on a Form T2200:
- Salary of an assistant, if this payment is required by your employment contract.
- The cost of supplies that are “consumed directly” in the performance of your employment, if your employment contract requires you to both supply and pay for them (this might be implied by the terms under which your employer told you to work at home). An example is paper and toner cartridges for your printer. Long-distance phone charges and cell phone airtime charges qualify, but not (in CRA’s view) flat monthly charges for phone and Internet access.
If you are an employee who works on commission, the allowable expenses are much broader. For example, as part of your home office expenses, you can normally claim a portion of your home insurance premiums and property tax. There are also a number of other special cases where specific employment expenses are allowed.
Employees — Reimbursements from the Employer
Generally, if your employer reimburses you for costs you have incurred, the reimbursement is a taxable benefit unless you incurred the expense primarily for the employer’s business purposes. The CRA has numerous administrative policies as to when reimbursement of a particular expense will be considered a taxable benefit.
In April 2020, the CRA announced that, because of the pandemic, employers can reimburse up to $500 of the cost of personal computer equipment to enable the employee to work at home, without this being a taxable benefit.
Self-Employed Persons — Home Office Expenses
If you are self-employed, home office expenses are deductible only if you fall into one of the following two categories (similar but not identical to those for employees discussed above):
- Your home is your principal place of business — that is, you do not have an office elsewhere. Note that even if you have a major client that provides you with an office on its premises, it is still the client’s premises and it will not disentitle you to your claim for a home office.
- The home office is used exclusively for your business, and is used “on a regular and continuous basis for meeting clients, customers or patients”.
You cannot use home office expenses to produce an overall business loss that is deductible against other income. However, losses disallowed because of this rule can be carried forward and used in any later year against income generated from the same business.
The allowable expenses will normally be based on the fraction of the home that is used for your office. See the discussion for employees above.
The expenses you can claim are the same as for employees discussed above, but also include mortgage interest.
You may also claim capital cost allowance (CCA — depreciation, normally at 4% of the declining balance of the home’s cost excluding the land) on the appropriate fraction of your home, but this is usually not advisable. If you claim CCA, the CRA will take the position that that fraction of your home is not part of your principal residence, and will disallow your claim for the principal residence exemption in respect of that portion of the home when you eventually sell the home.
Self-Employed Persons — Other Expenses
If you are self-employed, then for tax purposes you are “carrying on business”, and your business income is calculated using the same principles as any business. Most notably, unlike the rule for employees, you can deduct any expense that is required for your business, unless there is a specific rule disallowing it.
Therefore, supplies and other charges that relate exclusively to your business are fully deductible and not subject to the restrictions that apply to home office. Fully deductible expenses would normally include:
- a separate business phone line
- printer paper and toner cartridges
- computer repairs (assuming your computer is used for your business)
- stationery, envelopes and other office supplies.
Furniture and equipment (e.g., desks, bookcases, computers) are also fully claimable if purchased exclusively for your business, but only as capital cost allowance (depreciation), prorated over many years at the various allowable rates. Note that the Accelerated Investment Incentive rules introduced in 2018-2019 significantly increase the rate of CCA that can be claimed on purchases of new items.