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Home Office Expenses

by Glenda
(Canada)

Canadian Bookkeeper's Association

Canadian Bookkeeper's Association

I was wondering how you claim home office expenses when your home based business is a limited company.

Is it on your T1 or T2? If it is on your T2 then I am assuming the home office expenses would be for your company's fiscal year not calendar year.

Thank you!



image of fancy scroll lines





Hello Glenda,

This is a great question.

To answer your question, I went to my peers at the Canadian Bookkeeping Association for help.

We think there are three options available to you as the owner of a home based corporation. I'll present the three options but suggest that you may want to discuss this with your tax advisor to see what is best for your situation.




Option One - Employment Expenses

CRA's Income Tax Interpretation Bulletin IT-514 deals with work space in home expenses as does IT-352R2 discussing employee's expenses.

When you are an employee, the rules regarding home office expenses are slightly different and less broad than for the sole proprietor.

You must issue a T2200 Declaration of Conditions of Employment to yourself (as an employee of the corporation).

There is concern that this could be challenged by CRA because:

... Who stipulated it as a term of your employment?

... Who signs on behalf of the company?


Here is the excerpt from CRA's publication IT-352R2:

(a) the taxpayer is required by the contract of employment to pay for such office rent or salary, or to provide and pay for such supplies;

(b) the taxpayer has not been reimbursed and is not entitled to reimbursement for such expenses;

(c) these expenses may reasonably be regarded as applicable to the earning of income from the office or employment; and

(d) in the case of supplies, they are consumed directly in the performance of the taxpayer's duties of the office or employment.

Ordinarily, (a) above necessitates that there be an express requirement within the terms of a written contract of employment. Nevertheless, such a requirement for the payment of office rent, supplies or salary to an assistant or substitute may exist where the taxpayer can establish that it was tacitly understood by both parties (the taxpayer and the employer) that such payment was to be made by the taxpayer and was, in fact, necessary under the circumstances to fulfill the duties of the employment.




The tax bulletin also goes on to explain you can take the home office expense tax deduction if you meet one of the following conditions:

(a) the place where the individual principally (more than 50% of the time) performs the office or employment duties, or

(b) used exclusively during the period to which the expenses relate to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.

Where the individual meets the test in either (a) or (b) above, he or she will be able to deduct the expenses related to the work space only to the extent they do not exceed the income for the year from the office or employment as determined before deducting these expenses. Thus, such expenses cannot create or increase a loss for income tax purposes from the office or employment.



I explain, in Claiming Home Office Expenses for the Sole Proprietor, how to calculate the required proration.

However, your eligible expenses are not calculated on Form T2125 ... but on Form T777 Statement of Employment Expenses discussed in Business Use of Home.

CRA's guide T4044 Employment Expenses explains you CANNOT deduct mortgage interest, property taxes, home insurance, or CCA.

The only deductible expenses are the prorated cost of:
  • electricity;
  • heating; and
  • maintenance.

Be careful when claiming your maintenance expenses. The expense must relate to your work space.

For example, if you painted the kitchen, you cannot include a proration of the maintenance expense in your calculation as the maintenance was not related to your home office.

However, if you had painted the exterior of the home, you could include the prorated portion in your maintenance calculation ... as it benefits the whole structure.

Maintenance done solely to the home office would be 100% deductible.




Option Two - Reimbursement of Expenses

Update April 2, 2010 - please also read the post titled Corporations Must Have a Lease which follows in the comments section ... the Web Master.

This option would be my choice.

You could submit an expense account at the end of each fiscal year for the prorated amount of home office expenses.

Attached to the expense account should be all the appropriate source documents along with your calculation at how you arrived at your number.

You should discuss with your tax advisor whether to use the T2125 calculation or T777 calculation when determining which amount to submit for reimbursement.

If you choose not to discuss this with your tax advisor, the most conservative amount to book would be the T777 calculation.

As you are only reimbursing yourself for expenses incurred on behalf of the business, this would not result in a taxable benefit to you, the employee.

The office expenses would be debited to rent expense on your income statement.

In a transaction like this, I prefer to actually pay out the amount through a cheque or direct bank transfer as evidence that the transaction actually occurred ... rather than book it through shareholder loans ... but I believe it would still be acceptable to pay the expense account as a journal entry to your shareholder's loan account.




Option Three - Rental Charge

Update April 2, 2010 - please also read the post titled Changes In Use of Principal Residence which follows in the comments section ... the Web Master.

You could rent your office space to the corporation at fair market value. This method would require that you claim it as rental income on your personal tax return (T1) along with the appropriate expense deductions.

My worry over this solution would be that part of your home may become ineligible to remain tax free upon the sale of your home as a principle residence (principle residence exemption) ... as part of the home was "rental property".

This would possibly increase your taxes in the future ... when you eventually sell your home.



image of fancy scroll lines





As there is no clear cut answer to this question, I strongly recommend you discuss your options with your accountant / tax advisor.

Update April 2, 2010 - please also read the post titled Be Careful When Renting to Your Corporation which follows in the comments section ... the Web Master.

Thank you Glenda for this question. I learned something new. Sorry it took me so long to find and put all the information together. This is one of these instances where a person has to be well versed in tax law, which I don't claim to be. My area of experience leans more to the self employed sole proprietor ... Laura (aka Lake).




Resources used to answer this question - A big thank you to the Canadian Bookkeeper's Association (CBA) for assistance in answering this question.

The CBA is a national not-for-profit organization that was founded in 2003 and is committed to the advancement of bookkeeping professionals in Canada and to furthering the Canadian bookkeeping industry as a whole.

As a member of CBA, you can register to write their exam to obtain your Registered Professional Bookkeeper (RPB) designation.

For more information, visit their website at http://c-b-a.ca/.

Comments for
Home Office Expenses

Click here to add your own comments

Mar 17, 2010
 Home Office Expenses For Corporations
by: Nancy, CB

Note to readers: Nancy contacted me by email after I made the above post. She was kind enough to allow me to post her comments here to share with everyone .... thank you Nancy.




Hi, Laura

I have been watching the comments on the business use of home with regards to home expenses.

I have seen it handled two ways. One where it is handled just like we do for our sole proprietorship. % of use of home verses business use.

Or the other is just a flat rate for rent each month. This is not taken into account as income by the home owner as it is usually nominal and it is just a flat rate to cover the business portion of the home.

Usually the CAs that I work with prefer the flat rate. They usually look at the total utilities/interest/property tax etc. for the year. NO CCA Divide the Total By Twelve and average it to an even round figure ... like $300 or $500 depending on the actual space %. This saves a lot of time and it is expensed to Rent rather than Office use of home.

I think this is what most of our peers were saying.

Most of my clients are incorporated and work from home offices.

Also as an added note, do not take anything for Depreciation of the home as it will or can cause problems when you want to sell and it may cause your principle resident to be deemed Income generating. Thus, causing more headaches with regards to capital gains.

Other key things to remember are that the business use of home must be on a square footage % not on the number of rooms. You could add in a little for common use areas ? bathroom/hallway etc. And the CA that recommends the flat rate approach also recommends that his client pay themselves a monthly rent cheque of $???? or whatever the rate was decided upon.

Make sure it is reasonable. And one thing that I was told in a workshop years ago is to actually keep a diagram of your whole house with the dimensions and then show what is office with the square footage clearly marked.
Apr 02, 2010
 Changes In Use of Principal Residence
by: Lakeshore Bookkeeping Services

In Option 3 above "Rental Charge", I expressed concern about losing a portion of your principal residence exemption.

I came across a discussion of change in use rules regarding having a home office in your principal residence. I decided to find where CRA discusses this matter.

In Changing part of your principal residence to a rental or business property( see footnote), you will not have considered to have a deemed disposition of a portion of your principal residence if you meet all of the following criteria:

"(1) your rental or business use of the property is relatively small* in relation to its use as your principal residence;
(2) you do not make any structural changes to the property to make it more suitable for rental or business purposes; and
(3) you do not deduct any CCA on the part you are using for rental or business purposes."

If you do not meet ALL of the criteria, then ... at the time you change the use of the property, you will have been deemed to have sold and reacquired it. The rental/business portion of your home will be subject to capital gains when it is sold.

On the TaxDetective.ca website (operated by Eileen Reppengagen, CGA to help facilitate tax education and literacy**) under the Tax and Financial navigation button, you will find a link on Home Offices. Among the extensive array of links on the subject matter, I came across a CRA link with a worksheet on how to calculate the capital cost related to the partial change in use if you do not meet ALL the criteria above.

It is found under Business > Rental Income > Completing Form T776> Capital Cost Allowance> Special Situations> Changing from personal to rental use.





Resources used in this post: See CRA's website www.cra-arc.gc.ca under principle residence ... and also their Bulletin IT-120R6 Principal Residence ... Partial Changes In Use, and T4036 Rental Income Guide for more detailed information.

You may also be interested in this forum posting on Home Office Expenses.

*The amount "relatively small" would need to be interpreted by your accountant ... but I have come across 10% mentioned as the threshold.

**Eileen stresses that she is only providing tax education on her website and not tax advice. It is your responsibility for the applicability and accuracy of the information as it relates to your specific situation.
Apr 02, 2010
 Corporations Must Have a Lease
by: Lakeshore Bookkeeping Services

This still leaves the question of whether you can in fact claim a reimbursement of expenses as discussed in Option Two.

As discussed in the previous post partial change of use of your principal residence rules kick in when you have a home based business.

Eileen Reppenhagen, CGA, in the same section of her website TaxDetective.ca - Home Offices, talks about charging your corporation rent under the Corporate section. She refers to section 18(1)(a) and (d) of the Income Tax Act (ITA).

Eileen explains that this section of the ITA means you need to have a lease in place to charge your company rent ... which also means you need to claim it as rental income offset with rental costs allowed in the rental guide.

This is because section 18(1)(d) states you cannot charge an annual value of property except rent for property leased by the taxpayer for use in the taxpayer's business.

To muddy the waters further, the website taxtips.ca says, "If you rent out a part of your home, CRA's position is that you may only write off losses against other income if you have a 'reasonable expectation of profit' from the property rental" ... which is what ITA 18(1)(a) refers to in Eileen's references.



This suggests to me that when CAs, such as Nancy referred to in her post, don't take the "corporate rent expense" for their home based business into the client's personal income, it is because the rental income and expense net to zero ... which would have a zero effect on taxes payable. It also suggests that the CAs probably advised their clients to have a lease document prepared and on file.

Now that begs the question, "Are you allowed to rent to yourself at cost and not fair market value (FMV)?"

It is my understanding that the "rent" must be at FMV.


I would like to thank Eileen Reppenhagen for all of the time she devotes to tax education and literacy.
Apr 02, 2010
 Be Careful When Renting to Your Corporation
by: Lakeshore Bookkeeping Services

I participate in, and read through a number of forums.

While reading about an entirely different subject, "corporate rental of your principal residence" was brought up.

The post explained that claiming home office costs when you are self employed is not the same as renting to your corporation.

Seemingly, the corporation becomes a commercial (not residential) tenant. This means you as a landlord have to be registered for GST/HST regardless of the $30,000 threshold.

The post went on to say that you, as a landlord, should be reporting your rental income (at fair market value) and recording the costs on Schedule T776. You are not allowed to create a loss.

After looking at all the alternatives discussed, this solution appears to be the correct way to handle home office expenses for corporations.

This is clearly one area where consultation with your tax advisor on how to proceed would seem prudent. You can see there are a number of areas where professional judgement must be utilized to come up with a solution that can be defended to the tax auditor.

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