If you use a home office to earn income, you may be able to deduct some of your expenses on your income tax return. Your home work space deduction depends on your work situation, and whether you are self-employed or an employee. Read on for more information about tax deductions for taxpayers who work from home.
What home office expenses are tax deductible?
Before you can start deducting expenses related to your work office at home, you must first meet one of the following two conditions, as determined by the CRA:
Your home workspace is your principal place of business, or
You use it solely for the purpose of earning income, and on a regular and ongoing basis, such as for interacting with clients, customers or patients.
If you do meet one of the above conditions, you can deduct the portion of your expenses that are related to your home office from your income. If you are a business owner, partner in a partnership, or self-employed, you may be able to deduct expenses such as mortgage interest and capital cost for equipment such as furniture.
Deducting a percentage of your home for work
The percentage of space in your home you report as being for work must be calculated on a reasonable basis. For example, you could calculate the area of your work space divided by the total area of your home. Remember to include hallways, bathrooms, and the kitchen when calculating the total area of your home. You can only deduct expenses that you incurred to maintain your workspace. If you have the entire house painted, for example, the expense is not deductible. If you made urgent repairs to the roof above your workspace, however, part or all of the expense may be deductible. In Quebec, the rules are such that you can deduct the percentage of space your workspace occupies in your home, from your overall home maintenance costs. The Revenu Quebec guide to employment expenses offers the following example: Your workspace takes up twenty-five percent of the overall surface area of your home. You use the space for work eighty percent of the time. You can claim the following: If you rent your home, deduct:
20% (i.e., 25% x 80%) of your rent
20% of the cost of maintenance and minor repairs not included in the rent.
If you are a homeowner, deduct:
20% (i.e., 25% x 80%) of the overall cost of maintenance and repairs.
As with the federal rules, home office expense deductions may not exceed your income for the year after subtracting all your other employment expenses and any applicable deductions. Any amount in excess may be carried forward to future years.
What are the home office tax deduction rules?
As indicated above, your deductible expenses for a work office in the home depend on your work situation. As a salaried employee, you can claim certain expenses. Commission employees can add a few more expenses to their claims, and sole proprietors and partners can add even more. Read on for details.
Salaried employees
If your employment contract holds you responsible for paying all your home office expenses, you can deduct them, according to the CRA. The expenses must be directly related to your work. In addition, you neither received nor expect to receive any reimbursement from your employer. As stated above, to be eligible to claim home office expenses, your work area must be your principal place of business. That means you do more than fifty percent of your work in this space. In order to support your claims, your employer must complete and sign a copy of Form T2200, Declaration of Conditions of Employment. Section 10 of this form asks the employer whether the employee maintained a home workspace. The employer must indicate how much of the time you work there and whether they reimbursed you for your expenses.
For employees, itemize expenses
As an employee, you can deduct home workspace expenses including:
The cost of electricity
Heating
Maintenance.
You may only deduct such amounts after all other employment expenses have been deducted. You may not use your home office expenses to create or increase loss from employment. As an employee, you may not deduct expenses related to any of the following:
Mortgage interest
Property taxes
Home insurance
Capital cost allowance.
However, employees who work on commission are allowed to claim eligible property taxes as well as insurance. All your home workspace deductions must be related to the income you earned by working there. If you have other sources of income, make your deductions separately. As long as you still work for the same employer, you can carry forward home office space expenses. If you switch employers, you'll have to start from scratch. You may not create or increase a loss from employment by carrying forward home office expenses.
Other expenses (you might include the eligible portion of your rent and internet fees here).
You then subtract the amount related to personal use of the space and add any amount carried forward from the previous year. The total, entered on line 24 of the T777, is used to calculate any amount to be carried forward. To see if there's any amount to carry forward, subtract from your employment income the amounts entered on line 2 of Form T777, and on lines 207 and 212 of your tax return. The amount on line 2 of Form T777 is the total you entered for business income expenses, such as:
Accounting and legal fees
Advertising and promotion
Allowable motor vehicle expenses
Food, beverages, and entertainment expenses
Lodging
Parking
Supplies (e.g., postage, stationery, other office supplies)
Lines 207 and 212 of your tax return are for your Registered pension plan (RPP) deduction, and your annual union, professional, or like dues, respectively. Enter the total on line 25. Any amount that remains after calculating line 24 minus line 25 can be carried forward to future years.
Sole proprietors and partnerships
If you are self-employed, a business owner or a partner in a partnership, you can deduct your home office expenses if you meet one of the following two conditions:
Your home office is your principal place of business, or
The workspace is used only to earn business income, and you use it on a regular and ongoing basis to meet clients, customers, or patients.
You can deduct the business-use portion of expenses related to:
Heat
Home insurance
Electricity
Cleaning materials
Property taxes
Mortgage interest
Capital cost allowance (CCA).
You can also deduct maintenance, repairs, and renovations to your home office. Calculate the percentage of surface area your home office occupies in your living space. If you sometimes use the space for leisure, figure out what percentage of a 24-hour day you use it for work. Then use these figures to determine the deductible portion of your expenses, as indicated in the Revenu Quebec example above. If you are a renter, you can deduct the portion of your rent and expenses that relate to your home workspace. If you own your home, deduct CCA on your home office, and later sell your home, capital gain and recapture rules apply. Capital gain is when you sell a capital property for more than the total of its adjusted cost base plus outlays and expenses incurred to sell it.
Home office tax deduction - occasional use
If you have a space in your home that is not your principal place of business, but you use it exclusively for work, you can deduct some of your expenses related to that area. Thus, eligibility for the deduction depends upon dedicating the space for earning income, never for leisure. Here is an example from the CRA Income Tax Folio S4-F2-C2, Business Use of Home Expenses:
Ms. L's home office is not her principal place of business. Although, she uses it exclusively to earn business income, on a regular and ongoing basis, to meet with clients. It takes up 350 square feet in a 2,000 square foot home, for which she may claim household expenses of $10,000.
Ms. L calculates the deductible portion of expenses as follows:
Workspace in the home: Rent and interest on mortgage or hypothec
If you rent your home, you can deduct a reasonable portion of the rent related to your workspace. You may not, however, deduct the rental value of the space. You can deduct interest on a mortgage or hypothec related to your home office, as stated in section 2.22 of Income Tax Folio S4-F2-C2. The interest you pay must meet the following requirements, as stipulated in Paragraph 20(1)(c) of CRA Income Tax Folio S3-F6-C1, Interest Deductibility:
It applies to money borrowed for the purpose of earning income from a business or property
It applies to an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a business.
Such amounts must be paid or payable in the year for which you are claiming your expenses for the workspace. Even if your original loan was for a property that did not include a workspace, you can still claim the eligible portion. For Quebec partnerships, as described in Guide IN-155-V, the amount of rent you claim for a home office must not exceed 50% of the rent the partnership could otherwise deduct for the same fiscal period. Rent deducted for the fiscal period must not exceed the partnership's business income before the deduction. Any amount remaining can be carried forward.
Home office tax deduction form for sole proprietors and partners
