Are you working out of your home to run your own business? Does your employer require you to have an office at home? Are you a fully commissioned, home-based sales person?
Having to use your home to aid in your earning of income may qualify you for home office expenses that can be netted against your income. But in order to qualify, there are Canada Revenue Agency (CRA) criteria to meet.
If you are self-employed, your home has to be the principal place of carrying on your business, or your home office must be used exclusively to earn income by meeting with clients or patients.
The space to assemble or manufacture products for sale may also contribute to the availability of this deduction.
In addition to meeting the above CRA criteria, if you are an employee who is required to work out of home by your employer, it is necessary for your employer to supply you with form T2200, Conditions of Employment, indicating that you are required to have a home office.
If you fit either of these two situations, then you can use your home’s heat, electric, supplies, repairs and rent (if applicable) apportioned by the square footage of the space you use for your office versus the entire home’s square footage.
A rule of thumb to steer clear of a CRA red flag is to keep that portion of your office space in your home under 15 per cent.
By the way, if your home office is used some of the time as the kids’ study hall, than you are supposed to reduce your office apportionment by the percentage of time it is used by the kids. Confused?
Those with their own business can also deduct proportionally the cost of house insurance, property taxes, municipal services and mortgage interest.
If you are an employee, you cannot use these unless you are a fully commissioned sales person, then you too can use these deductions, except mortgage interest. Now are you confused?
You may have noticed no mention of the home phone/cable or Internet. That’s because they are typically disallowed by the CRA. My recommendation is that you set up a separate business account if it’s an important expense.
Occasionally I am asked if depreciation on the home can be included in the home office expense calculation. I typically advise against claiming any capital cost allowance since this may adversely affect the principal residence capital gains exemption when the home is sold in the future.
Regardless of what and how much is available for your claim, the CRA will not allow your home office expense deduction to exceed your income for the year. In other words, your home expenses cannot create a business loss.
However the CRA is kind enough to allow any unused balance to be carried forward and used against future income. Of course, you must again qualify for the home office deduction.
However, if you have had a career change, don’t forget about this carry forward. If in the future you again qualify for the home office deduction, it can be used at that time.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.
Tax Tips & Pits runs the first and third Mondays until April. Email him at ron.clarke@JBSbiz.ca