How do you know if you have a home office for tax purposes? Does the living room count as a home office if that’s where you check emails and edit documents on your iPhone? No, it does not. According to CRA rules found in the Income Tax Act (ITA), as a sole proprietor that is self-employed, you can only deduct expenses for the business use of a work space in your home – i.e. a home office – if one of the following conditions is met:
(1) That space is your principal place of business; or
(2) That space is used only to earn business income and is used on a regular and ongoing basis to meet clients, customers or patients.
Condition #2 generally relates to professionals that work primarily out of their home, such as massage therapists and accountants. It refers to a defined area of the home that is used exclusively for business purposes, which means that space is not used for personal use at any time.
Condition #1 is actually trickier than it sounds because the word principal is not defined in the ITA. As per CRA’s IT Folio S4-F2-C2, Business Use of Home Expenses, “in this context [the word principal] is generally understood to refer to the individual’s chief or main place of business”. It does not go on to define chief or main. It simply goes on to give an example of a building contractor that can deduct home office expenses because he performs administrative tasks for the business at the home office, making that his principal place of business. The contractor in the example also allows his children to use the space when he is not using it, which is okay as long as the space is considered the principal place of business.
For many self-employed individuals, it is condition #1 that will allow them to claim the home office expenses. However, if you are self-employed and rent or own space somewhere outside the home for your business, it is likely that your workspace at home does not technically meet CRA’s conditions to claim the related expenses because it is not the principal place of business.
If your home office does meet CRA’s conditions, there are many types of home expenses that can be claimed. This includes property taxes, mortgage interest (NOT the principal portion of your mortgage payments), hydro, heat, house insurance, house cleaning, maintenance costs and repairs, hot water tank rental, water, phone, internet, and security. If you rent your home, rental costs are also eligible.
All of these costs are then multiplied by the business portion of your home to arrive at the final deductible amount. For example, if your home office is 150 square feet and your total house square footage is 1500sf, you would multiply the expenses by 10% (150/1500) to get the deductible amount.
CRA also allows a deduction for depreciation (known as Capital Cost Allowance, or CCA) on capital assets, including the portion of your home that qualifies as noted above. However, if you do claim CCA on the house itself, that portion of the house loses its eligibility for the Principal Residence Exemption. Which means when you sell your home, you will pay tax on a portion of the increase in value since it was originally purchased. This means it is almost always a bad idea to claim depreciation on the home office space as the additional tax on the sale of your home may be far greater than the minimal tax savings over the years CCA was taken.
I should also point out that, if you are employed (rather than a self-employed sole proprietor), the information above still applies. However, you can only claim the home office expenses if you are required to use part of your home for part of your employment duties, the home office space still meets one of the two conditions listed previously, and your employer completes and signs a T2200, Declaration of Conditions of Employment for you to keep.
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*The blogs posted on this website provide information of a general nature and should not be considered specific advice. Please contact a professional accountant prior to acting upon or implementing any of the information included in the blogs.