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TAXFlash News from IncomeTaxCanada.net
:: Income tax deduction for the costs associated with Home Office
:: Maroney on Money for April 20, 2002 Many homeowners maintain an office, or at least something resembling an office, in their home. Equally common is the desire of these homeowners to claim an income tax deduction for the costs associated with such office space. Who is entitled to deduct home office expenses and what expenses are deductible differs depending on whether you are an employee or self-employed. For employees, the tax rules are severely limiting. For starters, employees hoping to make a claim for home office expenses will need to have their employer complete Form T2200. This form is essentially a declaration of the employee’s conditions of employment that will be used by CCRA to determine whether the employee is eligible to claim employment related expenses. Without this form, a home office expense claim won’t get out of the starting blocks.
In order to deduct any expenses incurred to maintain an office in your home, the following requirements must have been met during 2001: (a) you are required under your contract of employment (as certified on Form T2200) to pay for such expenses. This means an affirmative answer to question 9(a) on Form T2200; (b) you have not been, nor are you entitled, to reimbursement of such expenses by your employer, and (c) the expenses were incurred to earn your employment income. Notice that the first test makes reference to a “contract”. This doesn’t mean you need a big, thick tome detailing every aspect of your relationship with your employer. In fact, because a contract can be written or verbal, there isn’t even a need for the contract to be committed to paper – a verbal agreement with your employer will suffice. But simply satisfying the above requirements isn’t enough - CCRA imposes two further conditions, only one of which must be satisfied: (a) the work space is where you mainly do your work, or (b) you use the work space only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients or customers. Only once you’ve satisfied all of the above tests, will you be entitled to a tax deduction for maintaining an office in your home.
How much can you deduct for home office allowance?As a salaried employee, the expenses you can deduct include a reasonable portion of expenses incurred for the maintenance of your home such as fuel, electricity, light bulbs, cleaning materials and minor repairs. For employees earning commission income the list is expanded ever so slightly to include a portion of property taxes and insurance paid on the home. Conspicuously absent from the list of eligible expenses is interest on your home mortgage and tax depreciation (known as capital cost allowance in tax talk). Employees, remunerated by commissions or otherwise, are never allowed to deduct mortgage interest or capital cost allowance against their employment income – end of story. Then there’s the question, how much you can deduct? Well there really is no dollar limit, although, the deduction you claim must be “reasonable” and cannot exceed the income from employment to which the costs relate after deducting all other employment expenses except home office expenses. That is, home office expenses cannot be used to create or increase a loss from employment after you’ve claimed all other eligible employment expenses. If, in applying this limitation, you cannot deduct all of your home office expenses, the amount denied can be carried forward for deduction in the following year subject to the same tests and conditions. So just how do you calculate a “reasonable” amount? Good question and the truth is the Income Tax Act is silent on the exact method to be used. The most common approach is to calculate the total square footage of the office space and divide this by the total square footage of the entire home. For example, assume Mr. Homer Office is eligible to deduct expenses for maintaining a 100 square foot office in his 2,000 square foot, ten-room home (i.e., a home office occupying 5 per cent of the square footage of the home). During the year he paid $1,500 for hydro, $600 for maintenance, $500 for home insurance and $2,000 for property tax. As a salaried employee, Mr. Office can include only the hydro and maintenance expenses in his home office claim (i.e., $2,100). Following the square-foot method, Mr. Office will be entitled to a deduction of $105 ($2,100 multiplied by 5 per cent). If Mr. Office is an employee earning commission income, his deduction will increase to $230 because he is entitled to include home insurance and property taxes in his expenses. Obviously, following this method yields a pretty insignificant deduction so how about using a different method, say, one based on the number of rooms rather than square footage? Following the number-of-rooms method, Mr. Office will multiply his eligible expenses by 10 per cent (one room divided by 10 rooms) thereby doubling the amount he may deduct in comparison to the square footage option. Another alternative that will yield a larger home office expense deduction is to divide the square footage of the office by the total square footage of all of the rooms in the house. This approach eliminates the common area of the house from the denominator thereby providing a larger expense claim than the simple square footage option. But no matter which option you choose, after all is said and done, the home expense deduction available to employees is not the mother of all tax write-offs. In fact, you’ll be lucky if it saves you a few hundred bucks.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney