NOTE: This article concerns home office expenses for a business, not an employee working from home.
Owning a small business can have several perks, one of them being the ability to claim the cost of operating from a home office. In effect, some of your living expenses can become a deductible cost for your business.
There are of course a couple of conditions. To be able to claim home office expenses, you must meet ONE of the two following conditions:
1. It is your principle place of business;
2. You use the space only to earn business income, and you use it on a regular and ongoing basis to meet clients, customers or patients.
Point #2 is a very sticky one; the space must be a distinct and separate area of your home and cannot be used for any other purpose. In other words, using the kitchen table twice a week for processing paperwork does not entitle you to claim home office expenses.
Another key item to note for point #2 is meeting clients, customers or patients; this is where CRA really gets tough. If you are a Real Estate Agent, you could be disqualified on this point specifically as you likely have the use of a desk at the brokerage office and you virtually never have clients at your home.
Many of our clients have retail businesses, such as pet stores, restaurants etc. and they are disqualified on Point #2 as well.
Regardless of having a specific and dedicated office in your home, if you do not regularly meet with clients there, you will likely be disqualified from claiming home office expenses!
In a Tax Court of Canada Case, Layton v. the Queen, a lawyer from Ottawa maintained that she had a home office as well as an office in a building downtown; the home office claim was dismissed by the Tax Court under Point #2.
There are of course, always exceptions; in Vanka v. The Queen, a doctor argued that he took phone calls at night from home and occasionally would meet a patient in his home office. After examining all of the facts, the home office expenses were allowed.
So, assuming you have made it past the qualification criteria, what expenses can you claim?
• Mortgage Interest or Rent
• Repairs & Maintenance
• Property Taxes
• Alarms / Security Systems
There are very specific conditions surrounding the deductibility of each item listed above and in some instances limitations.
In addition to the above, Capital Cost Allowance (CCA or depreciation) can also be claimed, however, it is not recommended as it can trigger recapture at a later date if the home is sold.
In every instance, the claim for home office expenses must be pro-rated for the actual business use vs. personal use; similar to the requirement for claiming vehicle expenses.
The accepted method for making the calculation is based upon square footage. So if you home is 2,500 square feet and
you use a room that is 150 square feet as your office, you would be entitled to claim 6% of your total costs as your home office expense (150 /2,500).
There is one other restriction on the deductibility of Home Office Expenses and it is such that:
“expenses relating to the use of a work space cannot create or increase a loss for income tax purposes from the business for which the work space is used”.
In other words, home office expenses can be used to reduce taxable income from the business to $0, but the claim cannot create a business net loss.
Any unused home office expenses not deducted in a specific year can be carried forward and applied to taxable business income (same business) to future years.
Numerous clients have argued that ‘I have always claimed a home office and it has always been allowed’; that may be true, however, perhaps CRA has not ever reviewed their file.
Remember, CRA does not review each and every tax return to determine the deductibility of expenses, but if they do decide to review yours, make sure you are entitled to make the claim or the interest and penalties can be insurmountable.
Also remember, each and every situation is different; do not believe what your neighbour said, refer your questions to a tax professional.
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