One of the most common tax questions we get from Canadian self-employed individuals and business owners is about home office expense deductions. There is a lot of confusion around this topic as to what is and isn’t deductible and how much you’re eligible to deduct on your personal or corporate tax return. In this blog post, we hope to address your common questions about home office expenses. 

What Qualifies as a Home Office?

There are two ways that a space in your home can qualify as a home office

1. 1. The space in your home is used exclusively to earn employment income, and is used on a regular basis to meet (in person!) with clients, customers or other people.
   2. The space is used “principally” (more than 50% of the time) to perform your duties of employment for a period of at least 4 consecutive weeks. Your workspace can be a designated room which is used only for work, or it can be in a common area that has other purposes such as a kitchen table where you work part of the time.

Eligibility Criteria for Home Office Expenses

Generally, you can deduct home office expenses if you meet the following egibiity requirements:

1. 1. Your employer required you to work from home This requirement does not have to be part of your employment contract, however, it should be a written or verbal agreement. If you have voluntarily entered into a formal work from home arrangement with their employer, the employee is considered to have been required to work from home.
   2. You were required to pay for expenses related to the work space in your home
   3. You have a completed and signed copy of Form T2200, Declaration of Conditions of Employment, from your employe

What Expenses Can You Deduct for a Home Office?

As a salaried employee, you can claim expenses, such as:

• • Utilities 
  • Rent
  • Maintenance and minor repair costs, 
  • Home internet access fees (but not internet connection fees or leasing costs associated with a modem or router). 

The cost of office supplies, such as envelopes, paper, pens and sticky notes, are also deductible.

As a salaried employee, you cannot claim: 

• • Mortgage interest
  • Property taxes 
  • Home insurance, 
  • Capital expenses (such as changing a furnace or windows) 
  • Depreciation (capital cost allowance).

That means the cost of a new, ergonomic office chair isn’t deductible, nor is the cost of a large, widescreen monitor, both of which are considered capital expenses. 

For a more fulsome list, you can use the CRA’s home office expense eligibility tool here.

Home Office Expenses for Employees

If you are an employee who is required to pay for employment expenses that are not reimbursed by your employer, including those for a home office, you may be able to claim a deduction on your income tax return for such expenses.

You Must Pay for the Expenses

You must pay for the expenses, and cannot claim any expenses that are reimbursed by your employer. The expenses must be used directly in your work. 

Form T2200 

You must obtain a signed CRA form T2200- Declaration of Conditions of Employment from your employer.  This is a form that the employer fills out to certify the conditions of employment and that you were required to pay expenses. Note that you do not need to submit Form T2200 to CRA with your tax return. You’re simply required to keep it in your records in case the CRA asks for it.

Detailed Method 

In order to claim your expenses, you must fill out Form T777 (screenshot below) and file it with your income tax return. 

Home Office Expenses for Self-Employed Canadians

Self-employed Canadians generally have more flexibility and a broader range of deductible expenses for home office use. 

You can claim expenses, such as:

• • Utilities 
  • Rent
  • Maintenance and minor repair costs
  • Mortgage interest
  • Property taxes
  • Capital Cost Allowance (i.e. Depreciation)

We’ve bolded the last three expenses as these are allowed for self-employed individuals but not for salaried employees.

A quick not about Capital Cost Allowance (CCA) or depreciation. While you’re allowed to claim CCA for your home office expenses, it is generally advisable that you don’t do so as it could impact your eligibility for the principal residence exemption when you decide to sell your home.

Home office expenses can be easily claimed by self-employed individuals on Form T2125 (screenshot below). For a full discussion on Form T2125, read our blog post here.

Limitations

Home office expenses cannot create or increase a business loss. If your expenses exceed business income, the deduction is limited to the business income, with any unused home office expenses carried forward to future tax years.

Home Office Expenses for Corporations

If you own a corporation, the home office expenses are similar to the expenses that a self-employed individual can claim as outlined in the section above.

The key difference here is that a corporation does not have a form like the Form T2125 for self-employed individuals. The expense will be allocated to the profit and loss statement of the company with a corresponding entry as a shareholder contribution to the company from the owner.

Home Office Expense Example

You’re a self-employed Canadian who owns a 3,000 square foot home and use 300 square feet or 10% as a home office. Your expenses for the year are as follows:

• • Utilities: $6,000
  • Rent: $36,000

How much can you deduct as a home office expense?

You can deduct $4,200 = 10% * ($6,000 + $36,000)

Do you need with your calculating your home office expenses or have any questions? Let us help you. Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here.

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.