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Taking care of business: Home office deductions

04/09/2007


One of the questions I get asked most frequently by small business owners is, “What home office costs can I deduct?” Canada Revenue Agency (CRA) has strict rules regarding the deductibility of home office costs.

General Rules

Employees, commission sales employees, and self-employed persons can all deduct home office expenses, but the rules for each are slightly different. To deduct these expenses you must meet ONE of two criteria.

Either

A. Your home workspace is where you principally perform the duties of employment (this means that you do more  than 50 per cent of your business or employment duties at home).

Or

B. Your home workspace is used...

...exclusively for the purpose of earning income (this means you cannot use the area for anything else)

And

...on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing your business duties.

It is important to note that the general rule is A or B. If your home is where you principally perform your work duties (Part A), you do not have to use part of your house exclusively for business. In this situation you could have a home office that you also use as a guest room. You would have to determine what percentage of time the room was used for business when you calculate the portion of home office costs to deduct.

Once this general rule is met, the home expenses you deduct must be apportioned based on the square footage of your home office space related to the entire square footage of your home.

What You Can Deduct...

Rules for Employees. In order to deduct home office costs as an employee, you must be required by your employer to provide and pay for the expenses you claim (the employer must fill out a T2200 form each year), the expenses must be incurred solely to earn employment income, and the employer cannot reimburse you for these expenses.

As an employee, you can deduct a reasonable portion of the costs to maintain the premises. These would include fuel, electricity, cleaning materials, light bulbs and minor repairs. If your home is rented you can claim a portion of the rent. If you own the home you cannot make a deduction based on the rental value of the space you are using. Also, you cannot deduct mortgage interest, house insurance, depreciation or property taxes.

Rules for Commission Sales Employees. In addition to the deductions permitted to an employee, as a commissioned sales person you may also deduct a portion of your property taxes and house insurance.

Rules for Self-Employed Persons. In addition to the deductions available to the commission sales employee, as a self-employed person you can deduct a portion of your mortgage interest and capital cost allowance (depreciation). However, it is not always advisable to claim capital cost allowance on your home office space. If you do, this portion of your home will no longer be eligible for the principal residence deduction. This means that when you sell your home, if it has appreciated in value you will have to pay tax on the increased value for the portion that you used as your home office.

In all cases the home office deduction is limited by your business, commission or employment income for the year, after all other expenses have been deducted. This ensures that you cannot create a loss with your home office costs. You can, however, carry any unused costs forward and use them in following year.

Expenses such as office supplies, long distance calls, cell phone airtime, and similar items are not related to your home workspace and therefore are not subject to home office rules. These are deductible as regular expenses. It is important to clarify the rules related to telephones. If you only have one phone line to your home, it is considered to be a personal expense; only business long distance would be deductible. The cost of the phone line itself can only be deducted if it is a separate business line.

The rules regarding home office expenses are complicated, but knowing what you can deduct, will help you take care of your business.

By Wendy Lewis, CA. Published in the Comox-Valley Record. For more information, please contact your local MNP advisor or Wendy at 250.338.5464.