Can you claim your home office as a tax deduction? – BDO’s Scott Conner explains

Saving tax with home office deductions

The count-down to the income tax filing deadline has started. If you are like most people, you will want to minimize the amount of your hard-earned income that gets sent to Ottawa.

Self-employed taxpayers have the right to deduct reasonable expenses incurred to earn income for their business. Employees, on the other hand, have a lot less flexibility. There are certain types of deductions employees can use to reduce their tax bill. One often overlooked area is the home office expense. The deduction for expenses relating to a home office is allowed in multiple areas of the Income Tax Act. The type of work you do will impact on how the rules treat you.

The two-test question

The Income Tax act will only permit an employee to deduct home office expenses if one of the following two tests is met:

1) The workspace must be “the place where the individual principally performs the duties of the office or employment.”

The ordinary dictionary definition of “principally” (chiefly, mainly, above all) has been adopted by the Canada Revenue Agency. If the facts indicate that a taxpayer simply uses their office in the evenings to catch up on paperwork, it is highly unlikely that the evening use is greater (in terms of time) than the use made of their office provided by the employer during their work day.

2) The second test is a two-pronged test.

i) The workspace must be used exclusively for the purpose of earning income from employment. Note that the requirement is not that the space be used exclusively for employment purposes for the entire year, but only for the period to which the expense relates. Thus, if you can demonstrate that your office is used exclusively for business purposes, this test is met.

ii)The office be used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of office or employment.

If one cannot pass either of these tests, home office expenses are not deductible.

Restrictions on certain expenses

Certain home office expenses are limited or denied entirely depending on the type of employment. For example, mortgage interest, home insurance, and property taxes are not allowed as deductions in employment settings where there is no commission income.

No income, no deduction!

Home office expenses are limited to income from employment and cannot be used to generate a loss. Any amounts so restricted can be carried forward to a future tax year where it can be claimed against income from the same employment.

Is it in the contract?

The Canada Revenue Agency has commented in their technical interpretations that an informal at-home arrangement that does not require the employee to work at home does not permit the home office deduction. Form T2200 Declaration of Conditions of Employment completed by the employer helps formalize the arrangement requiring the employee to incur expenses as part of their employment.

Where should you work?

So, tax issues aside, is it better to work from home or commute to an actual office? It is a complicated answer at times but some CEOs of Fortune 500 companies have recently come out against home office arrangements citing a much stronger workplace culture when the team is together in the same office.

If you have questions about claiming home office expenses, contact the Huntsville office of BDO at 705-789-4469.

Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.

Scott Conner, CPA, CA
Tax Partner
BDO Canada LLP
Direct: 705 789 4469 ext 1824
[email protected]