Working from home has become increasingly common in recent years. While your living expenses are generally personal in nature, a portion of these expenses may be deductible if you meet certain criteria. Both employees and self-employed individuals may be eligible to claim home office expenses depending on the circumstances.
Individuals can deduct home office expenses if the work space is:
a) The principal place of work (business, office or employment) of the individual; or
b) used exclusively to earn income (business, office or employment) and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of their business, office or employment duties.
“Principal” is not defined in the Income Tax Act . It is generally interpreted to mean the primary place of work where greater than 50% of the work activities are performed. If an individual rents a separate office space but occasionally works at home on evenings and weekends, it is likely that the rented space would be their principal place of work and they would not meet the first criteria.
“Exclusively”, “regular” and “continuous” are the key words to assess in the second criteria. Exclusively means the office space can not be used for any other activities. Therefore, you can not deduct expenses for an office space that is also used for personal activities. You also can not deduct expenses in respect of your business or employment usage of a common space such as your dining room or living room. Regular and continuous are not clearly defined and require analysis on a case-by-case basis. One or two meetings per week likely will not satisfy this requirement, but multiple meetings each work day likely will.
Once you have assessed eligibility, how do you determine the amount to claim? You are required to apportion your expenses on a reasonable basis. The most common method is based on the square footage of your office space as a percentage of the total square footage of your home. For example, if your office space is 150 square feet and your home is 1000 square feet, then you can deduct 15% of your eligible expenses. You may need to further adjust this claim for personal usage if you are deducting expenses under the principal place of work criteria as you are not required to use the space exclusively to earn income under this criteria. For example, if the space is 15% of your home and you use it to earn income five days per week and use the space personally two days per week, then you can claim 10.7% of the eligible expenses (15% × 5/7).
Eligible expenses differ depending on whether you are an employee or self-employed. Self-employed individuals have few limitations on the expenses they can claim. Common expenses include rent, mortgage interest, property taxes, insurance, utilities, repairs and maintenance. Repairs and maintenance expenses should be essential to the entire home such as repairs to heating or ventilation systems. A specific repair to a room besides the office space should not be claimed, while a repair specific to the office space can be claimed in full without being subject to the apportionment above.
You must assess whether expenses are capital in nature. Capital expenses can not be deducted in the year of payment. Self-employed individuals may be able to claim capital cost allowance (CCA) on items such as furniture and equipment. CCA generally should not be claimed in respect of capital additions to the home, such as an improvement to heating or ventilation systems, as it may jeopardize access to the principal residence exemption when the home is sold.
Employees who earn commission income are eligible to claim the same expenses as self-employed individuals, subject to limitations imposed by the amount of commission income earned. Employees who do not earn commission income are not eligible to claim mortgage interest, property taxes or insurance.
Home office expenses are only deductible up to the amount of income reported from the business, office or employment. If your home office expenses exceed the income to which the deduction relates, the excess amount can be carried forward indefinitely and claimed in a future year.
Individuals working from home may be able to reduce their year-end tax bill with a home office deduction.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA