Working From Home and Deductions
Do you work from home? Can you deduct home office expenses? Here is a brief guide that will help you maximize your deductions.
More and more people are working from home nowadays. If you use part of your home as a self-employed worker, you can deduct certain expenses thereby reducing your net income and paying less tax. To be eligible for this deduction, which is often misunderstood, you must meet two basic criteria:
- The space being used must be your main place of work, meaning that more than 50% of your work time must be carried out in this space;
- The space occupied by your office (or workshop) must be used almost exclusively to earn business income. In other words, if you work at your dining room table, you are not eligible. However, if you have a separate room that is dedicated to your business, you meet the criteria.
Generally speaking, if you had to pay rent and utilities in a commercial building, there would obviously be deductible expenses. The rule is the same for a home office, but the calculations are a bit more complex.
First, you must compile all relevant expenses and provide supporting evidence. In general, these expenses include:
- Mortgage interest;
- Municipal and school taxes;
- Electricity, gas or oil;
- Maintenance, including a housekeeping service.
You will then need to determine what percentage of these expenses you can deduct. There is no specific rule, but you must use a reasonable method of calculation based on your type of business and apply it consistently.
The most common method is to deduct a percentage of your home expenses that is equal to the percentage of the total area of your home that is occupied by your workspace. For example, if your home office is 10% of the total area of your home, you can deduct 10% of your total eligible expenses – as long as the space is used exclusively for commercial purposes.
There are cases, however, when the percentage of the area is not an appropriate calculation method. An example would be the use of a barn or a vegetable garden. Each case is different, but if the method of calculation is reasonable, it should be accepted by the tax authorities.
If you wish, you can also deduct an amount from the capital cost allowance, or a depreciation amount. Be aware that this amount could be the subject of a collection, and thus become taxable when you sell your home.
The amount of expenses you can claim as a deduction is limited to the total revenue generated by your company. Home office expenses cannot be used to create or increase a loss. If your business income is not sufficient to deduct all of your expenses, these expenses can be carried forward to future years.
Finally, when preparing your tax return, you must complete and attach form T2125 Statement of Business or Professional Activities, as well as its provincial equivalent, detailing the expenses relating to the commercial use of your home.