More and more Canadians are electing/forcing to work or operate a business from home. Many individuals who have a home office are not aware of the full extent of the tax deductions available to them.
The first consideration is whether the taxpayer is an employee and need to maintains a work space in their home for employment or is self-employed and maintains a workplace in their home for the business.
An individual may deduct expenses paid for the employment use of work space in home as long as one of the following conditions is met:
- The work space is where they mainly work (more than 50% of the time),
- The work space is used only to earn employment income and it is used on a regular and continuous basis to meet clients or customers, or other people in the course of the employment duties.
Form T2200, Declaration of Conditions of Employment has to be completed and signed by employer.
An individual may deduct expenses paid for the business use of work space as long as one of the following conditions is met:
- It is the principal place of business,
- The space is used only to earn business income, and it is used on a regular and continuous basis to meet clients, customers, or patients.
If the above conditions are met the taxpayer may deduct a portion of the following expenses that relates to the home office.
As only a portion of the home is used as a home office, the taxpayer needs to determine what percentage of the expenses they may deduct. This amount is determined by calculating, the area of work space divided by the total area on a reasonable basis.
Please note that the claiming capital cost allowance is often not advisable as Canada Revenue Agency will disallow the use of the principal residence exemption for that fraction of the property, when it is sold. Furthermore, the capital gain and recapture rules will also apply if the taxpayer deducts capital cost allowance on a part of the home and sells it later.
Limitations and Carry Forward
Work Space in Home (commission / salaried employee)
- Deduction is limited to the amount of employment income remaining after all other employment expenses have been deducted. This means tax payer cannot use work space expenses to create or increase a loss from employment.
- The taxpayer may only deduct work space expenses from the income to which the expenses relate, and not from other income
- If the taxpayer cannot deduct all their expenses in the year, they may be carry forward and deducted the expenses in the following year as long as they are reporting income from the same employer
Business in Home (self-employed)
- Deduction of home office expense cannot exceed the net income from the business before the deduction of these expenses. In other words tax payer cannot use this expenses to create or increase a business loss.
- The taxpayer may deduct the lesser of the following amounts:
Any amount carried forward from the previous year, plus the business use of home expenses incurred in the current year;
The amount of net income (loss) after adjustment.