Business-use-of-Home Expense Calculation Employees, Self-Employed, Corporate Owners
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.
If you have a home office simply take the square footage of your workspace and divide it by the total square footage of your house to determine the percentage of home expenses which would be deductible for income tax purposes.
For example, if your home office is 100 square feet (10 feet by 10 feet) and your whole home is 1000 square feet (25 feet by 40 feet) then 10% of your home expenses would be eligible as a deduction (100 square feet divided by 1000 square feet is 10%).
Depending on whether you are employed or self-employed you can claim a portion of the following expenses each year:
Apply the business-use-of-home percentage calculated above to the total of home expenses for the year from the categories listed above to determine the allowable claim for business-use-of-home expenses.
Additional benefit for corporate business owners
Claiming business-use-of-home benefits corporate business owners by reducing your personal taxable income for the year.
Business-use-of-home expense is charged against your shareholder loan account (as though you made a loan to your corporation by paying for its share of these expenses). This reduces your shareholder loan balance for the year and the amount of the salary/dividend that you will reflect on your personal income tax return.
In addition to you being able to withdraw tax-free dollars from your corporation the corporation itself receives a tax deduction for the home expenses it is reimbursing you for.
A few criteria to meet for expenses to be eligible
Subsection 8(13) and subsection 18(12) of the Income Tax Act provide two criteria which need to be met for a portion for your home expenses to be deductible:
• The space must be your principal place of business – If there is a space in your home which is the principal place where you conduct your business that space is eligible to be claimed for home office expense, even if that space is also used personally. So for example, if a contractor had a room or space in his/her home which was used to perform duties of running the contracting business, such as receiving work orders, bookkeeping, purchasing, and preparing payroll while other duties of the business such as completing projects are carried out at the customer's location, the space or room would be considered the contractor's principal place of business.
• If the space is not your principal place of business then it must be used exclusively for the purpose of earning income from employment/business and must be used to regularly meet your clients, customers, or patients – The space in your home must be a dedicated space or room and must not be used for any other purpose other than earning income from employment or business. With regards to regular meetings with clients, customers, or patients Canada Revenue Agency indicates that each case will be judged based on the facts of each situation. A home office used by a doctor to meet one or two patients a week is an example of a work space which would not be considered used on a regular basis for meeting patients. On the other hand, a work space used to meet an average of 5 patients per day for 5 days each week would clearly be considered to be used on a regular basis.
Home office expenses can be claimed to the extent that they reduce your income from employment or business to NIL. If claiming your home office expenses would result in a loss those losses are carried forward indefinitely and applied against taxable income in a future year from the same source of income.
Additional requirement for employees
For employees it must be required by an employment contract that the employee maintain a workspace in his/her home as a condition of employment.
Your employer must complete for you form T2200 Declaration of Conditions of Employment which you will keep on file and submit to Canada Revenue Agency should it ever be requested from you.
For more information about deductions for employees, see T4044 Employment Expenses.