Basics, Business Income, Expenses, Self-Employed, Tips & Advice

Run a Business Out of Your Home: What You Can Claim?

Is your home where you run your business from?

Is your business your home?

More and more self-employed Canadians are opting for home offices and that makes a ton of sense.  Working from home does have its perks, such as; Avoiding the daily commute, being able to balance home and business better, and in some cases being able to hold meetings in your PJ’s.  An added bonus to having a home-office is that the Canada Revenue agency (CRA) permits self-employed Canadians to deduct expenses related to earning a profit in their home-based business, which reduces the amount of net income earned in that business.

These expenses (also referred to as Business-use-of-home expenses) are an extremely valuable tax saving opportunity for many self-employed Canadian taxpayers.  The absolute best way to reduce the amount of tax owing is to claim every single tax credit and tax deduction that is available (and applicable) to your business and using TurboTax Self-Employed achieves that goal.

But, we feel very strongly that in order to be the best advocate for your business, you need to understand what deduction might be available and how to claim them, if applicable, so you’re going to have to read on, and learn so key tips from the tax experts at TurboTax.

Here’s what you need to know about claiming your office expenses if you run a business out of your home.

Does My Home Office Qualify?

The Canada Revenue Agency (CRA) states you can deduct expenses for the business use of a workspace in your home, as long as you meet one of the following conditions:

  1. It’s your principal place of business; or
  2. You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

If your workspace meets one of those criteria, you are then able to deduct home office expenses!

What Can I Deduct?

A wide range of expenses can be claimed including:

  • Maintenance costs such as heating, hydro, electricity and water
  • Home insurance
  • Cleaning materials
  • Rent
  • Property taxes
  • Mortgage interest
  • Routine maintenance and incidental repairs

Calculating Your Business Use of Home Expenses

How much of the above expenses you can claim depends on two factors:

  1. The size of your home office space is in relation to the size of your home and
  2. If your home office is used only for business purposes.

If you home office is used solely for business purposes, calculating the proper percentage of your expenses to claim is quite easy. If your work space is confined to one room of your eight-room home, then 1/8 (.125 or 12.5%) of the total expenses may be claimed.

If, for example, your property taxes are $1,600/year then you are able to claim 1/8th of that, or $1600 x 12.5%, which is $200.  That $200 is reduced from your business income.

If your home office space is not fully dedicated solely as a home office but also doubles as maybe a dining room, kitchen or playroom, then you have to perform another calculation in order to determine the amount that you can claim.

For example, if your office doubles as a kitchen table, then you will need to calculate how many hours in the day you use the room for your business, and divide that amount by 24 hours. So, if you use the room for 6 hours out of a 24 hour day, then your kitchen table is your office 1/4, or 25% of the day.

Using the same property tax example as above, then the amount eligible to be claimed is then further reduced to $50.00 (1/4 x $200).  If you only use the kitchen table to operate your business 3 days out of the week, then you would have to further reduce the amount eligible to be claimed.

Keep in mind these additional facts;

You can not use these expenses to increase a business loss, or to create a business loss.

If you are unable to fully deduct all of your home-office expenses because they would create a loss (which usually indicates that your business income is too low) you can carry-forward losses for future years until your business income is high enough to claim it.

Capital Cost Allowance

Another eligible business use of home expense is the depreciation of your home itself and this deduction is known as a Capital Cost Allowance (CCA). Many small business owners are tempted to take the deduction to lower any tax payable, however, there are some significant tax consequences which come when you sell your home.

By taking a CCA deduction, a portion of your home loses the principal residence tax exemption which means that when you sell your home, you have to pay capital gains on the depreciated portion of your home.  Principal residence’s are not subjected to capital gains otherwise.