Do you use a home office for earning employment or business income? Claiming home office expenses on your tax return is going to reduce your taxable income and save you money.
In my previous article “Calculating Business-use-of-home expenses”, we showed what are the conditions under which business use of home expenses are expendable and how are they calculated?
However, Covid-19 presents some issues and challenges as described below.
COVID-19 Issues and Challenges
In order to deduct COVID expenses, the work-space in home must have been the Owner-Manager’s principal place of business. The “principal place of business” requirement as used in subparagraph 18(12)(a)(i) is arguably less restrictive than the parallel rule in subparagraph 8(13)(a)(i). However, that the work-space in home need only be the Owner-Manager’s principal place of business, and not the place where he or she principally performs their duties, does not present a lesser challenge for the Owner-Manager. While “principally” generally means more than 50% of the time, “principal”, in the context of subparagraph 18(12)(a)(i), generally means chief or main place of business.
Further, it is the Canada Revenue Agency’s (“CRA”) position that where “an individual has two or more places of business in respect of the same business, the work-space must be the principal place of business in order to meet the requirement” described in subparagraph 18(12)(a)(i).
It is not certain whether the work-space of the Owner-Manager who did not work from home before COVID-19 will meet the “principal place of business” requirement in subparagraph 18(12)(a)(i). In light of the COVID-19 crisis, it will be up to the CRA to determine whether the Owner-Manager’s work-space in home could be considered the “principal place of business”, notwithstanding that the Owner-Manager generally operates his or her business in another place.
It is not certain whether the Owner-Manager, working from home, even in a segregated work-space used exclusively for business, would meet this part of the test.
If the Owner-Manager’s work-space is not the principal place of business, he or she can deduct Business-use-of -home Expenses, if the work-space is used “exclusively” to earn business income and used on a “regular and continuous” basis for meeting clients in respect of the business. It is the CRA’s position that “exclusively” means “only to earn business income” and that “[a] work space will be used exclusively to earn business income if it is a segregated area, such as a room or rooms, that is used in a business and for no other purpose.” In essence, a “work space that is not an individual’s principal place of business must be used exclusively for the purpose of earning income from business and therefore, may not have any personal use.
”In reality, many Owner-Managers, like employees, worked, or are working from their dining tables and kitchen counters in the middle of their homes. If the CRA maintains its position, it is clear that Owner-Managers who do not have a segregated work-space will not meet the requirement in subparagraph 18(12)(a)(ii). Further, if the work-space is segregated, it must be used only for business purposes. Unlike subparagraph 8(13)(a)(ii), subparagraph 18(12)(a)(ii) does not enable use of the space for a “period”. It appears that if the Owner-Manager’s segregated work-space was used for personal reasons at any time, the requirement will not be met.
Regular and Continuous Basis for Meeting Clients
In respect to the “used on a regular and continuous basis for meeting clients” requirement, it appears that the Courts and the CRA differ in their views. The CRA’s traditional view is that for the purpose of subsection 18(12), meeting clients, customers or patients refers to meetings held in person.
The CRA maintains this view, notwithstanding that in Vanka, the Court found that a doctor’s use of his home office for average of one patient per week and seven phone calls per evening met the “regular and continuous” test.
Similarly, in Hémond,the Court found that “although the office was not taxpayer’s principal place of business (neither in terms of the time he spent there nor in terms of the amount of work performed there), it was maintained exclusively to conduct his practice. In Hémond, the office was used exclusively for professional purposes “to manage and plan his business, for professional development, to review patient files and analyze laboratory test results, to meet with some patients and pharmaceutical representatives, and to make and receive telephone calls.
”On the other hand, the Court found in Molckovsky, that seeing one patient per week and receiving on average one phone call per week did not meet the “regular and continuous” basis test. It was determined that the space in Mr. Molckovsky’s home was neither used exclusively for the purpose of earning income, nor was it used on a regular and continuous basis for meeting clients.
In Rail, home office deductions where denied as the home office was not Mr. Rail’s primary place of business. Since the Mr. Rail did not meet clients regularly from home, he was not entitled to expenses related to administrative office from home.
The CRA rejected the Court’s position in Vanka and Hémond, but given in-person meetings were and still are largely discouraged during COVID-19 and virtual meetings with clients became the default, it will be up to the CRA to determine whether it will maintain its position on this issue. It is not certain whether the Owner-Manager, working from home, even in a segregated work-space used exclusively for business, would meet this part of the test.
While certain expenses, such as the cost of telephone and internet services, supplies such as stationery, and other similar expenses relating to the business are not subject to the requirements in paragraph 18(12)(a) and as such are deductible as regular business expenses, it is unlikely that without legislative change or an administrative concession by the CRA, the Owner-Manager will meet either of the requirements in subparagraphs 18(12)(a)(i) or (ii) and as such will not be able to deduct COVID-19 Expenses.
Conditions of Deductibility of Business-use-of-home Expenses
Provided the Owner-Manager meets either of the requirements described in paragraph 18(12)(a), the prorated portion of rent, capital cost allowance, property insurance, property taxes, interest on mortgage or hypothec, operating expenses such as heat and light, and maintenance costs and minor repairs of the Owner-Manager’s home related to the work-space, may be deducted, but only to the extent they do not exceed income for the year. As such they cannot be used to create or increase a loss but un-deducted expenses may be carried forward. Where the “principal place of business” requirement is met, “the expenses should be apportioned between business and non-business use on a reasonable basis.
”If the work-space is part of rented home, a reasonable portion of the rent expense is eligible for deduction and, inter alia, the deductibility of interest on mortgage or hypothec is subject to the conditions outlined in paragraph 20(1)(c). However, expenses relating to outlays on account of capital or those related to personal or living expenses are not eligible for deduction.
It is uncertain whether Owner-Managers, who did not work from home before COVID-19, will meet the requirements set out in paragraph 18(12)(a). To provide relief, the CRA may consider administrative concessions in respect to:
1. the “principal place of business” requirement to allow the Owner-Manager’s
work-space in home to be considered the principal place of business during the period for which the Owner-Manager was working from home during COVID-19;
2. the “used exclusively” requirement to allow the Owner-Manager who do not have a segregated work-space in home to otherwise meet this requirement where the work-space is also used for personal enjoyment; and
3. its traditional view on “meetings” to include virtual meetings
In the absence of new rules, legislative changes and/or administrative concessions by the CRA, the Owner-Manager should maintain the work-space in home as their principal place of business, or, ensure that the work-space in home is in a segregated space not used for any purpose other than for the purpose of earning business income.