The Home Office Tax Deduction for Canada
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.
What are the home office tax deductions available in Canada for 2019?
The government made no changes to existing 2018 home office tax deductions for the 2019 tax year. If you’re self-employed and you have a home office, form T2125 lists all your expense categories. Some expenses are fully deductible (only the portion used to earn income). Enter those expenses in part 4.
Other expenses fall under business-use-of-home, and they’re prorated based on the size and usage of your office space. Part 7 covers your business-use-of-home expenses.
Deductible business expenses – Part 4 (business portion only):
In part 4 of the form, enter any business portion of expenses not covered in part 7 (business use of home). Here’s a list of the main expenses, with associated line numbers and explanations:
T2125 Part 4 – business expenses
8521 Advertising (business-related – 100% deductible)
8690 Insurance (insurance for a business property is 100% deductible)
8760 Business taxes, licences, and memberships (100% deductible)
8810 Office expenses (pens, pencils, paper clips, stationery, and stamps)
8811 Office stationery and supplies (supplies needed to perform business services, such as drain opener and plastic piping for a plumber – 100% deductible)
8860 Professional fees (includes legal and accounting fees for your business only)
8910 Rent (business office or land not in the home; home office rent goes in part 7)
8960 Repairs and maintenance (cost of labour and materials but not capital expenses, for any minor repairs/maintenance, only for a business property, not a home office; you could include 100% of the cost of cleaning services and maintenance and repairs for your home office space, not your entire home)
9060 Salaries, wages, and benefits (including employer’s contributions)
9200 Travel expenses (see CRA’s specific rules)
9220 Utilities (claim nothing here if you’re already deducting expenses in part 7 and your home office is your only office)
9275 Delivery, freight, and express (postage, couriers for business – 100% deductible)
What home office expenses are tax deductible?
If you’re self-employed, a business owner or a freelancer, you can deduct (reasonable) expenses for the business use of your home in part 7 of form T2125, as mentioned above. Be careful though; some expenses in part 7 appear to overlap with part 4. Other expenses in part 4 only apply to business properties (but not your home) rented or owned to earn income.
T2125 Part 7 – business-use-of-home expenses
- Home insurance
- Cleaning materials
- Property taxes
- Mortgage interest: only the interest is deductible, not the principal. Lenders usually provide a summary of interest and principal paid for the year on the December statement. If your home office is a dedicated space in a rented property, you can include your rent. You can also include condo fees.
- Capital cost allowance (CCA). You may not want to claim CCA! See below.
Why tax experts don’t recommend claiming CCA on your home office
Although the CRA allows it, as soon as you claim CCA for part of your home, that part loses its tax-exempt status! You’ll have to pay capital gains tax on the home office portion when you sell your home. In our example above, the home office represents 20% of the home. If you sold your home for $500K, $100K would be subject to tax.
Salaried and commission employees: Work-space-in-the-home expenses
Salaried and commission employees can also deduct certain expenses, which CRA calls work-space-in-the-home expenses.
You can deduct home office expenses if you work mainly (more than 50% of your hours) at your home office. Alternatively, you’ll qualify if you use the space only for work and on a regular and continuous basis for meeting clients or customers.
Salaried employees who pay their own office expenses and aren’t reimbursed by their employer are eligible. Also, your conditions of employment must require you to have a home office and you must get a signed form T2200 from your employer stating this (in Quebec, form TP-64.3-V).
Eligible expenses include:
- The cost of electricity
- Cleaning supplies
- Property taxes (commission employees only)
- Home insurance (commission employees only)
If you rent your home, you can claim a prorated portion of the rent, but no mortgage interest or CCA. Use CRA form T777, Statement of Employment Expenses, to calculate your work-space-in-home expense deduction.
Work-space-in-home expenses help lower your employment income subject to income tax but can’t create a loss (exceed your income). You can carry forward unused expenses to the next tax year.
Are home office renovation costs tax deductible in Canada for 2019?
Home office renovation costs may be tax deductible for self-employed individuals. However, renovations are capital investments, not expenses. You can only claim them as CCA. Tax experts don’t recommend claiming the CCA on a home office, because it eliminates the tax-exempt status of that part of your home!
Assuming the home is your principal residence, your CCA claim for a few thousand dollars could result in a nasty surprise: capital gains tax in the tens of thousands, depending on the value of your home when you sell it.
If you still want to proceed, here’s what you could claim:
- If you’re only renovating your home office, you can claim the entire renovation cost as CCA
- If you’re renovating the entire home, you can only claim the portion related to the home office
- If you’re renovating part of your home, not including your office, you can’t claim any CCA