In Canada both self-employed and qualified employees are able to claim expenses related to having a home office, although the deductions available differ significantly.
The Canada Revenue Agency (CRA) allows Taxpayers to deduct business-use-of-home (self-employed) or workspace-in-the-home (employee) expenses from your income which lower the amount of taxable income being claimed, which reduces the overall tax burden.
The first thing that must be determined is if the work-space qualifies for either of these deductions, and then, which expenses are eligible to be claimed.
Defining Self-Employed Versus Employed
As a general rule, the CRA defines an employee as someone who enters into a contract of service with an employer, and a self-employed person as someone who enters a contract for service with a business, individual or other payer.
When employees are paid, their employers deduct Canada Pension Plan (CPP) contributions, Employment Insurance premiums and income tax from the payment. Self-employed people, in contrast, receive straightforward payments for the work they do, and they must take care of their own CPP, tax and insurance obligations.
Whether you are self-employed or an employee, you may still be able to claim a home office deduction if you and your home office meet certain criteria.
Identifying a Home Office
As an employee, if your employer wants you to work from home, or if that is the agreement to work from home, then there are home office deductions which may be claimed, provided the arrangement meets one of the two criteria:
- Your home office must be exclusively for working
- You must use that space to complete more than 50% of your work
There are three additional requirements for an employee claiming business-use-of-home expenses:
- Your employer must require you to maintain a home office as part of your contract of employment
- Your employer must not reimburse you for those expenses.
- Finally, you must fill out and have your employer sign, Form T2200, Declaration of Conditions of Employment.
Self-employed individuals who want to claim home offices must meet one of the following:
- Your home office must be the principal place of your business
- You must use the space exclusively for business purposes on a consistent basis.
Calculating Your Home Office Deductions
To determine how much you can deduct for your home office expenses, calculate the size of your office as a percentage of your home’s total size.
For example, if your home is 1,500 square meters and your office is 300 square meters, your office is 20% of your home’s total size, which means you are able to deduct 20% of many home expenses as home office expenses on your tax return.
If, however, you use your office for both personal and business use but still meet the other criteria to declare it as a home office, you must calculate the portion of time you use your space for work and then apply that figure to your percentage.
For example, if you use the space eight hours per day, every day for business, you use it as a home office 33% of the time. Multiply the usage percentage by the percentage related to your office’s size — the product of those two numbers is the amount of your home expenses you can subtract as home office expenses.
To illustrate, if your home office is 20% of your home’s total size and you use it 33% of the time as an office, the percentage of expenses which can be deducted is 6.66%.
Determining Home Office Expenses
The rules for claiming home office expenses depend heavily on your type of employment:
- Both self-employed individuals and eligible employees may claim expenses for heat, electricity, water, maintenance, and rent if applicable.
- Commission employees and the self-employed may also claim property taxes and insurance.
- Only self-employed taxpayers may claim mortgage interest as a home office expense.
If you have maintenance costs that are related exclusively to your home office, you can deduct the entire portion of those expenses.
Home Office Expense Limits
In some cases, you may not be able to claim the entire amount of your home office expenses in a single tax year, especially if you started a new job or business late in the year. The allowed claim for employees is limited to the amount of employment income remaining after all the other employment expenses have been claimed. Self-employed taxpayers are limited to the net income of the business before the expense is claimed. In other words, both employees and self-employed individuals cannot create a loss from claiming home office expenses. The excess expenses can be carried forward and in most cases can be applied to future years.