Taxes
If you work out of your home to earn income, CRA lets you deduct certain expenses for using part of your home as an office, depending on how your business is set up. The expenses you can deduct fall into 2 categories:
- For self-employed individuals
- Work-space-in-the-home expenses, for salaried and commissioned employees
Home office expenses: don't make it personal!
The nature and use of your workspace determine the type of home office for tax purposes. Your workspace could be an area or a room inside your home, an attached office like a converted garage, or a detached building on your property. 
If your home office is a dedicated space for business use, you'll be able to deduct more of your expenses. If the area also has personal uses, you'll have to prorate your home office expenses based on the hours and days you work in it weekly. You'll get the maximum deduction if you use a separate, dedicated room or office. Read on for a detailed example.
CRA has strict rules for deducting home office expenses:
- Criteria #1: Your home office space must be the principal place of business; OR
- Criteria #2: you use the space exclusively to earn business income on a regular AND continuous basis for meeting clients, customers or patients.
If you run your business from home and it's your principal place of business (PPB), you meet the first requirement, which means you're entitled to deduct home office expenses. For cases where a home office isn't your PPB, it must be a dedicated office space (no personal use) that's used regularly to earn income and to meet customers. If your home office situation requires you to meet clients or patients on a regular basis, an appointment log is important, cautions tax author Evelyn Jacks. Use it to prove when meetings occurred at your home office.
That sounds easy! But wait, there's more!
If you use your home office space both for personal and work purposes, your home office tax deduction will be drastically lower. Why? Because CRA only lets you deduct a portion of expenses based on the number of hours per day and days per week you work in it. For example:
- Scenario 1: Your home office is a closed office in the basement, and you're the only one who uses the space. You work 30 hours per week, spread over five days.
- Scenario 2: You use part of your living room as your home office, and you follow the same work schedule. Because your workspace is mixed use, you have to calculate the ratio of hours and days you work in the space to the days/hours in a full week (7 days, 168 hours).
- In scenario 1, you have a dedicated work space, and personal use is nil. In this case, calculate the ratio of office square footage to home square footage. For example, 400 sq. ft/2,000 sq. ft = 20%. You can deduct 20% of your home office expenses. See part 7 of Form T2125, Statement of Business Expenses. Accuracy of measurements is crucial.
- In scenario 2, your workspace is also 400 square feet, but it's part of your living room. Because it's a mixed-use space, you have to reduce your expenses based on the number of hours and days you work there during the week. 400 sq. ft / 2,000 sq. ft = 20%; 6 hours of work per day / 24 hours = 25%; 5 days in operation per week / 7 days = 71%.
- In scenario 2, you'll only be able to claim 3.55% of the expenses listed in part 7 of the T2125 (20% x 25% (0.25) x 71% (0.71) = 3.55%).
Dedicated office space
In this example, your home office expense deduction is 4-5 times lower if you don't have a dedicated home office space! If you work long hours and have significant expenses (such as mortgage interest), setting up a dedicated office space could really pay off. Although the definition of what CRA considers a dedicated workspace is subject to interpretation, if you can't use an entire room, you might separate an area with dividers, and calculate the square footage.
What's new in 2019? Still no changes for online businesses!
If your home office isn't your PPB, it must be a dedicated space. You'll also have to use the home office and conduct face-to-face meetings with clients regularly and continuously. This will be challenging if you don’t meet customers very often or don't have any local clients.
If you meet clients at another office, at your PPB or elsewhere, or infrequently in general, you don't meet CRA's second criteria. You'll have to prorate your expenses claimed, as illustrated in scenario 2 above.
Will the CRA modernize?
Whether by choice or through neglect, CRA hasn't made changes to the wording to allow for modern business practices like online meetings. Laura Kenway, a certified professional bookkeeper, explains in her detailed analysis of CRA's home office deduction criteria, how CRA ruled against taxpayers in recent years. CRA denied home office deductions, claiming that meetings through email, telephone, and Skype don't satisfy the home office in-person meetings requirement for businesses with a principal place of business elsewhere.
Fast forward five years to 2019, and the government's wording still hasn't changed to accommodate current business practices and the use of online meetings. Checks with CRA business tax call centre agents confirm there's no change in the works. But they do acknowledge that new technologies lessen the need for face-to-face meetings.
Will the government change the wording for criteria 2? Maybe not, because the requirement targets professionals. The current rule discourages them from setting up a secondary home office whose primary purpose is to harvest tax deductions. Professionals such as doctors and lawyers meet patients and clients every day. The rule makes sense for them.
In the meantime, if your home office isn't your PPB and you don't meet clients there in person on a regular basis, prorating your expenses would be the conservative approach. However, an accountant might have a different opinion and specific insights and recommendations.
