With the physical distancing measures in place due to the spread of the COVID-19 virus, many Canadians are now working from home. If working from home is new for you, you may be wondering whether there are any tax deductions you can claim. What expenses would be eligible and what documentation would be required?
The Canada Revenue Agency (CRA) calls home office expenses “work-space-in-home-expenses”. In this article, we’ll provide an overview to help you navigate these work-space-in-home deductions.
A limited number of employment expenses are available for deduction for salary employees. However, employees earning commission income have a bit more flexibility. In any case, there are several conditions that must be met before any of these expenses can be deducted.
Currently work-space-in-the-home expenses can only be deducted if all of the following conditions are met:
- Your employer required you to pay for the expenses related to the workspace in your home used to carry out your employment duties. Employees cannot simply decide to work from home. The requirement to use a home office should be included in your contract of employment.
- Your employer did not reimburse you for the work-space-in-the-home expenses and will not reimburse you in the future.
- Your employer provided you with a completed Form T2200 Declaration of Conditions of Employment that is signed by the employer. This form summarizes the items that the employer requires the employee to pay out of pocket and any related reimbursements or allowances paid by the employer.
- One of the following conditions must also be met:
- The workspace is where the employee performs the duties of his office or employment more than 50% of the time, or
- The workspace is used exclusively to earn employment income and is used on a regular and continuous basis to meet with customers, clients or others in the course of performing employment duties. This effectively means that the home office space must be used only for work related business.
For employers who have had a substantial change in how their employees perform their work, it remains unclear as to whether the government will relax any of the above rules to make it easier for employees to claim work-space-in-home expenses in this unique environment.
- If the above conditions are met, employees can deduct the portion of their costs that relates to their workspace. This may include the cost of electricity, heating, maintenance, cleaning supplies and minor repairs.
- Only employees earning commission income who meet the conditions above can deduct property taxes and home insurance.
- Employees who rent can deduct the percentage of rent and maintenance costs related to their workspace. Employees cannot deduct mortgage interest nor capital cost allowance on their dwelling.
- All employees are required to complete Form T777, Statement of Employment Expenses section to claim these expenses when filing their personal income tax returns.
Note: please refer to the Calculating Your Workspace section below on how to calculate the percentage of home office expenses that are deductible.
The amount of expenses an employee can deduct is limited to the amount of employment income earned as a result of incurring those expenses. An employee cannot create a loss from claiming work-space-in-the-home expenses or apply these expenses against other sources of income. However, they can carry forward any unused expenses to be applied against employment income in the following year so long as the income is from the same employer.
If employees think they may qualify, they should consider approaching their employer to complete Form T2200. If the employee deducts work-space-in-home expenses they should maintain records of their home office expenses and keep a signed copy of the Form T2200 on file in case the CRA conducts a review of these expenses.
Special Rule in place for 2020
As announced on November 30, 2020, in the Fall Economic Statement 2020, due to the recent shift in work arrangements of many employees as a result of COVID-19, the CRA will allow employees working from home in 2020 to claim up to $400 in employment related expenses without the need to track detailed expenses and without the need for a signed Form T2200. Further details will be communicated by the CRA in the coming weeks.
Some employers may offer to pay their employees a flat rate allowance for using their home office (for example a fixed amount per month). This flat rate allowance would generally be taxable to the employee and deductible by the employer.
Employers may also consider reimbursing their employees for some specific home office expenses such as the cost of a laptop, an extra monitor, a desk or chair. An employee would usually have to submit an expense report to their employer with the supporting receipts to claim the reimbursement.
Generally this reimbursement would be a taxable benefit to the employee as there is often a significant personal-use component to these items. However, CRA has announced that due to the shift to working from home, a reimbursement of up to $500 for the purchase of personal computer equipment and home office furniture would not be taxable to the employee if the item enables the employee to perform their employment duties from home. But remember that if a specific work-space-in-home expense incurred by the employee was reimbursed by the employer, the employee cannot deduct this amount as an employment expense on their tax return.
Self-employed individuals have significantly more flexibility when claiming work-space-in-home expenses as compared to employees. They can deduct expenses for the business use of a workspace in their home, as long as they meet one of the following conditions:
- the workspace is their principal place of business or
- the workspace is used only to earn business income and the space is used on a regular and ongoing basis to meet clients, customers, or patients.
Self-employed individuals can deduct a portion of all workspace related expenses available to employees earning commissions plus mortgage interest and capital cost allowance. Self-employed individuals who rent can deduct the percentage of rent and maintenance costs related to their workspace. Part 7 of Form T2125, Statement of Business Activities is filed with the personal tax return to claim these expenses. Records should be maintained along with supporting documents to support these expense claims.
Refer to the Calculating Your Workspace section below on how to calculate the percentage of home office expenses that are deductible.
Similar to employees, self-employed individuals cannot use their business-use-of-home expenses to increase or create a business loss. However, any excess business-use-of-home expenses which cannot be used in the current year can be carried forward and applied against future business income.
Capital Cost Allowance Claims: Affect on Principal Residence Exemption
The capital gain and recapture rules will apply if the self-employed individual deducts capital cost allowance on the business use of their home and later sells their home. This may trigger unnecessary income taxes.
If capital cost allowance is not claimed on the workspace, it may be possible to shelter the entire capital gain of the property using the principal residence exemption if the following conditions are met:
- the owner otherwise meets the conditions to designate the property as their principal residence for all years of ownership,
- the business use of the home is ancillary to the main use of the property as a residence, and
- there has been no structural change to the property to create a separate self-contained space.
As such, claiming capital cost allowance on the portion of the home used for business should be done only under professional advice.
Calculating Your Workspace
The rules are generally similar for both employees and self-employed individuals when calculating the percentage of home expenses that are deductible.
To calculate the percentage of deductible expenses, a reasonable basis must be used, such as the area of the workspace divided by the total finished area (including hallways, bathrooms, kitchens, etc.). For maintenance costs, it may not be appropriate to use a percentage of these costs. For example, if the expenses paid (such as cleaning materials or paint) were to maintain a part of the house that was not used as a workspace, then none of these expenses are deductible. Alternatively, if the expenses were paid to maintain the workspace only, such as the cost of paint to be used exclusively for the home office, then the entire cost would be deductible.
A final note to be mindful of: Reasonability
A red flag may be triggered for the CRA if they view the square footage of the workspace area as too high or unreasonable compared to the total finished area of the dwelling. As such, the CRA may deny or reduce the deduction for work-space-in-home expenses. Claiming a high percentage of the home as business use may also put the principal residence exemption in jeopardy as the property may be considered primarily for business or employment use instead of for personal use.
As you can see, the rules for claiming home offices expenses may be complex, so working with your IG Consultant and tax advisor can help you navigate these work-space-in-home deductions and determine how they may impact you and your family.