A Guide To: The Home Office Tax Deduction
If you work out of your home to earn income, the CRA lets you deduct certain expenses for using part of your home as an office. Depending on how your business is set up, the expenses you can deduct fall into 2 categories:
Business-use-of-home expenses - for self-employed individuals
Work-space-in-the-home expenses - for salaried and commissioned employees
Home office expenses: don't make it personal!
The nature and use of your workspace determine the type of home office for tax purposes. Your workspace could be an area or a room inside your home, an attached office like a converted garage, or a detached building on your property.
If your home office is a dedicated space for business use, you'll be able to deduct more of your expenses. If the area also has personal uses, or you share it with someone like your spouse or kids, you'll have to prorate your home office expenses based on the hours and days you work in it weekly. You'll get the maximum deduction if you use a separate, dedicated room or office. Read on for a detailed example.
CRA has strict rules for deducting home office expenses:
Criteria #1: Your home office space must be the principal place of business; OR
Criteria #2: You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients
If you run your business from home and it's your principal place of business (PPB), you meet the first requirement, which means you're entitled to deduct home office expenses. For cases where a home office isn't your PPB, it must be a dedicated office space (no personal use) that's used regularly to earn income and to meet customers. If your home office situation requires you to meet clients or patients on a regular basis, an appointment log is important. Use it to prove when meetings occurred at your home office.
That sounds easy! But wait, there's more!
If you use your home office space both for personal and work purposes, your home office tax deduction will be drastically lower. Why? Because CRA only lets you deduct a portion of expenses based on the number of hours per day and days per week you work in it.
Dedicated office space
If you work long hours and have significant expenses (such as mortgage interest), setting up a dedicated office space could really pay off. Although the definition of what CRA considers a dedicated workspace is subject to interpretation, if you can't use an entire room, you might separate an area with dividers, and calculate the square footage.
What home office expenses are tax deductible?
If you're self-employed, a business owner or a freelancer, you can claim (reasonable) expenses for the business use of your home. The types of expenses will depend on if you are a business owner, a salaried employee, or a commission based employee.
Business Owners:
Business-use-of-home expenses
Heat
Home insurance
Electricity
Cleaning materials
Repairs and maintenance (more on this later)
Property taxes
Mortgage interest: only the interest is deductible, not the principal. Lenders usually provide a summary of interest and principal paid for the year on the December statement. If your home office is a dedicated space in a rented property, you can include your rent. You can also include condo fees.
Capital cost allowance (CCA). You may not want to claim CCA! See below.
Why tax experts don't recommend claiming CCA on your home office -
Although the CRA allows it, as soon as you claim CCA for part of your home, that part loses its tax-exempt status! You'll have to pay capital gains tax on the home office portion when you sell your home. In our example above, the home office represents 20% of the home. If you sold your home for $500K, $100K would be subject to tax.
Salaried and commission employees:
Work-space-in-the-home expenses
Salaried and commission employees can also deduct certain expenses, which CRA calls work-space-in-the-home expenses.
You can deduct home office expenses if you work mainly (more than 50% of your hours) at your home office. Alternatively, you'll qualify if you use the space only for work and on a regular and continuous basis for meeting clients or customers.
There are more rules for salaried employees however, when it comes to work-space-in-the-home expenses. Salaried employees who pay their own office expenses and aren't reimbursed by their employer are eligible for only some of the expenses. Also, your conditions of employment must require you to have a home office and you must get a signed form T2200 from your employer stating this (in Quebec, form TP-64.3-V).
Eligible expenses include:
The cost of electricity
Heating
Maintenance
Cleaning supplies
Property taxes (commission employees only)
Home insurance (commission employees only)
If you rent your home, you can claim a prorated portion of the rent, but no mortgage interest or CCA. Use CRA form T777, Statement of Employment Expenses, to calculate your work-space-in-home expense deduction.
Work-space-in-home expenses help lower your employment income subject to income tax but can't create a loss (exceed your income). You can carry forward unused expenses to the next tax year.
Are home office renovation costs tax deductible?
Home office renovation costs may be tax deductible for self-employed individuals. However, renovations are capital investments, not expenses. You can only claim them as CCA. As mentioned above, we don’t usually recommend claiming the CCA on a home office, because it eliminates the tax-exempt status of that part of your home!
Assuming the home is your principal residence, your CCA claim for a few thousand dollars could result in a nasty surprise: capital gains tax in the tens of thousands, depending on the value of your home when you sell it.
This will be a case-by-case basis though, so make sure to speak to a professional on your specific situation to get the best tax plan in place!
If in your case you would like to proceed, here's what you could claim:
If you're only renovating your home office, you can claim the entire renovation cost as CCA
If you're renovating the entire home, you can only claim the portion related to the home office
If you're renovating part of your home, not including your office, you can't claim any CCA
How Small-Books can help
Keeping up with all the rules around home office deductions and other business expenses can be a full time job on it’s own! When you work with Small-Books, we worry about staying on top of all that; so you can focus on running your business.
We’ll help you track your expenses and make sure you are taking advantage of every tax deduction available to you! Plus we send you financial reports monthly so you can understand your finances better than ever. Then at tax time, we take care of filing your taxes.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Small-Books assumes no liability for actions taken in reliance upon the information contained herein.
