Home Office Deductions

by Ann Forbes
(Omemee, Ontario Canada)

What portion of my bills for heat, hydro, insurance bills etc am I allowed to claim for a home based business?

I have been told that 1/3 is acceptable.

Hi Ann,

No that is not correct.

You must use CRA's proration method explained in How to Prorate Home Office Expenses.

While there, pay particular attention to the portion of the article that has a list of Things to Consider - Home Office Expenses to Include ... Home Office Expenses to Exclude.

You may also be interested in reading a post by another visitor where Change In Use of a Principal Residence is discussed.






P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Home Office Expense Deduction

by Valerie
(Montreal, Quebec, Canada)

Hello,

I qualify for the home office expense deduction. However, I am hesitant to do so as I am under the impression that when I sell my home that I am required to claim a percentage (same as I used for my expenses) of my "gains" as a source of business revenue?

Am I correct? Or seriously mistaken?

Many thanks in advance,
Valerie

Hello Valerie,

There is part truth in what you are worrying about ... the possibility of capital gains on the sale of your home ...

... and part fiction ... the amount is not related to your business revenue but the use of your home rules.

I am going to assume you are a sole proprietor as I answer this question. At the end of this post I will give you links relating to a corporation or employment expenses.

So read on and maybe I can put your mind at ease.




Evelyn Jacks, a Canadian tax expert, in her book Make Sure It's Deductible encourages the self-employed to take advantage of all their tax saving opportunities ... one of which is maximizing your home office deduction.

The important thing to remember when claiming common business expenses like a home work space ... is to follow the rules as this deduction is frequently audited.

I discuss the rules in my article How To Claim Your Home Office Tax Deduction.


Key Points:

1. It's usually a good idea to claim home office expenses last. As they can never be used to create or increase a loss, the deduction can be carried forward to a future year .... if it is not used in the current year.

2. Read the section of my article (referenced above) on Things To Consider carefully ... to understand restrictions when claiming mortgage interest, insurance or maintenance expenses ... just as an example.

3. Do NOT claim capital cost allowance (CCA) on your home ... because you would put yourself in the position of having to pay tax upon the sale of your home .... which is I think where your worry lies.

However, there are exceptions to this ... and your accountant would best be able to provide advice specific to your circumstances. Stephen Thompson, author of 167 Tax Tips for Canadian Small Business discusses some of them in his book.

4. There are CRA rules regarding changing part of your principal residence to a rental or business property that you need to be aware of. I believe this also is where some of your concerns about claiming home office expenses come in. I encourage you to take the time to read about it on the CRA website.



Where to find the CRA reference that concerns you

• Go to www.cra-arc.gc.ca.


• Select the A to Z index on the left hand side. Choose the letter "P" for individuals and click on Principal Residence.


• Once there, click on changes in the use of a principal residence".


• Under "Special situations", choose the third link titled Changing part of your principal residence to a rental or business property.

Note: I've begun limiting the number of direct links to the CRA website because sometimes the information gets moved around. If I tell you how to get to it, even if it is moved on the site, you should still be able to find it.



I am currently doing some research on how to claim office expenses if you are incorporated. My initial information on the subject is located in the Q&A on Home Office Expenses for Corporations.

I am not totally satisfied with my answer posted on home office expense for corporations yet as I have come across some conflicting information on option two presented ... so I am doing some more research. It's the old ... just because people are doing it doesn't make it right. I'm hoping to find a reference somewhere to back it up. I will be posting the change in use information there later this week ... and other information as I find it.

If you are looking to claim home office expenses because you are an employee who can claim employment expenses, Q&A Business Use of Home is where you will find your relevant data.



Valerie, if you found this information useful, I would truly appreciate you taking the time to post a comment back letting me know ... or if you want me to clarify something ... or this response brings up more questions ... it makes my day if I know I've been able to help you ..... ;0)

Business Use of Home

by Abraham
(Hamilton, Ontario, Canada)

Greetings,

I saw your online article and then dare to ask you a question. I hope that you will give me a few minutes to answer it.

I am an RN (registered nurse) who works 2 jobs. I have full time employment where I work 7 days bi-weekly. Also, I have a casual-part-time job where I pick up 2 to 4 days bi-weekly.

I drive my own 2000 mini-van about 68 km to 100 km one-way to each casual-part-time job assignment.

I do use part of my home to organise and run this job and I have done some maintenance and furniture setup. I have no visitors into my home-office as my part-time employer communicates with me via cell and home phone, and e-mail.

I am wondering if my casual-part-time work could qualify as home-office business?

Thanks




Hello Abraham,

I'm not sure which article you read on my website .. but I am going to assume it was Home Office Expenses - How to Claim Your Tax Deduction.

Business use of home has strict criteria you must meet to qualify for this tax deduction but ...

First off, before I can point you a particular direction ... to help you answer your question, I need to know whether you are hired as an employee or an independent contractor at your casual part time job.

There are different rules for the two situations ... but it sounds to me like you are employed because you make reference to your "part time employer".



Employee

If you are an employee, then you need to read about work-space-in-the-home expenses on Canada Revenue Agency's (CRA) website. Just type in employment expenses in CRA's search box.

Your employer would have to complete a form T2200 Declaration of Conditions of Employment in order for you to qualify to make the deduction.

As an employee, you would receive a T4 from your employer and you would report this income on line 101 of your T1. If your employer does not issue a T4 slip for some reason, report your income on line 104 of your T1.

Your employment expenses are filed on form T777 Statement of Employment Expenses ... and carried forward to line 229 of your T1 ... thereby reducing your total income ... but only if you have a T2200 from your employer.



Independent Contractor

If you are an independent contractor, then it sounds like your work would fall under criteria one (described in my home office expense article).

Because office space is prorated on hours of operations each day AND days in operation each week under criteria one, your tax deduction will likely be small ... but every tax savings helps.

As an independent contractor, you would file form T2125 as part of your personal tax return. The gross and net amounts are carried forward to line 162 and 135 respectively on your T1.



Don't Know If You Are An Employee or An Independent Contractor?

If you are not sure which category your casual part time work falls under ... take some time to read my side bar chat on determining if you are in fact self employed.

I hope this helps you out Abraham. If I haven't understood your question properly, just post back here under comments.

Enjoy your work this week! :0)

Business Use of Home

by Big Bossman
(Sask Canada)

Business Use of Home vs. Business Paying Rent to Me

I think the title is self explanatory. My wife is currently running a fairly profitable home based business. She, according to the CRA, is only allowed to claim 11% of home expenses according to square footage used.

I am wondering if She would be better off "paying us" rent from business proceeds and avoid all of the paperwork in calculating paying bills how much is business and how much should be coming out of our own pocket. If this is legal then I become a landlord correct? And then following that route I would then be able to claim portions of expenses I have running the house right?

I am just curious to know what this might do to our year end Income Tax time. I am also currently employed outside the home and not sure what this might do to my Income Tax return. I would ask an Accountant but I don't want to come across as shady or a crook. I just want to know the best way to run this business.

I should also mention that the business is quite profitable as there are very few expenses to claim. Please help!! We need all the tax breaks we can go for otherwise we will be paying a huge income tax bill I'm sure.

Hello!

What a great Andy Capp cartoon. :0) I'm sorry I couldn't publish it due to copyright issues ... but for readers ... it showed Andy standing and yelling "I refuse to work myself to death just to keep myself alive!". Underneath the cartoon, Big Bossman had placed the caption "Feels like most days !!!!"

With regards your questions .... I am going to assume your wife is a sole proprietor which means the only way she can claim home expenses is by completing the Calculation of business-use-of-home expenses on form T2125 - Statement of Business or Professional Activities.

The rules on claiming use of your home expenses has strict criteria and renting is not an option unless the business is incorporated.

Anyone deciding to "rent" their principal residence should be aware of the rules pertaining to changing part of your principal residence to a rental or business property*. You don't want to put yourself in the position where you have a deemed disposition on a portion of your home ... which means you would pay capital gains on the business area when you sell your home.

I wouldn't hesitate to see an accountant. The questions you are asking are legitimate. It is not considered shady or being a crook to plan your tax strategy so that you pay the least amount of taxes. You are obligated by law to only pay your fair share.

Given that your wife's business is successful, an accountant is trained to help her reduce her taxes by advising on the best ways to take advantage of legal tax deductions available to her. An accountant would also be able to help your wife decide if it is time to incorporate.

People start businesses to be profitable. All small business owners need to realize there are only 5 ways to pay no tax and arrange their affairs for this eventuality. It's a hard lesson to learn after the audit.

The good news is accounting consultations and expenses are a legitimate business expense which is tax deductible.

I hope this information helps you out.


*See the April 2, 2010 comment titled "Changes In Use of Principle Residence".

Claiming Business Use of Home

by Tboy
(BC Canada)

Unregistered Business Needs Deductions

For the past 5-6 years I have run a computer repair business, I have made no more that $25,000 in any given year, never collected any taxes.

For the past 4 years I have not filed a return. I am now in the process of doing them (I am also not doing the computer work any more).

I do have a office full of computers/parts that I have had for years in my home. Is there a way I can write off the office space, heating, etc for that office?

Hey Tboy!

For the years you were in business, you may be able to claim the home office business deduction if you meet CRA's criteria.

Check out Do you qualify for the home office expense deduction?.

The key is whether the space was/is used as a work area to earn business income.

The space being claimed shouldn't be too large as change in use of principal residence rules may come into play.

If your business use is relatively small in relation to your principal residence, you did not make structural changes, and did not deduct CCA, then a deemed disposition does not apply.

It is my understanding that relatively small is loosely defined as less than 10% of your residence. See CRA Bulletin IT-120R6 Principal Residence ... Partial Changes In Use for more information.

You will not be eligible for the claim in the years you were not conducting business.

Good luck with the filing your back taxes!

Home Office Expenses

by Glenda
(Canada)

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!

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.








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/.