The home office
If you work out of your home you may be able to deduct a portion of your home office expenses. However, there are a number of rules, and the rules differ depending on whether you’re self-employed or an employee.
If you’re self-employed, expenses must relate to a workspace that is either your principal place of business, or used exclusively for the purpose of earning income from the business. “Principal” is generally interpreted as more than 50% of the time. For the second criterion to apply, the space must also be used on a regular and continuous basis for meeting clients, customers or patients. If you qualify to claim home office expenses, you can deduct a portion of the operating costs of your home. For example, assume your home office takes up 10% of the total square footage of your home. You can claim as a deduction from your business income 10% of your mortgage interest (not principal), property taxes, heat, hydro, water, home insurance and maintenance costs. Any expenses directly related to the home office can be deducted in full.
Home office expenses can only be deducted from the business carried on in the home and cannot be used to create a business loss. Eligible expenses you are unable to use in the year they are incurred can be carried forward to subsequent years and deducted from income generated by the business at that time, as long as the business-use criteria discussed above are still met.
Example: Suppose you started a business in 2016. It generated revenues of $60,000 in 2016 and expenses, other than home office expenses, of $55,000. The portion of eligible home expenses attributable to your office space amounts to $6,200. You’ll be able to claim only $5,000 of the home office expenses in 2016 (i.e., $60,000 – $55,000). The remaining $1,200 can be carried forward and claimed against income generated by the business in a subsequent year.
In general, it’s not a good idea to claim depreciation on the portion of your home used for business purposes, since there may be negative tax implications if you ever sell your home. If you do not claim depreciation, your entire house may be regarded as your principal residence (see topic 107) and any gain realized on its eventual sale may be tax-free.
If you’re registered for the GST/HST and you qualify to claim home office expenses, input tax credits (ITCs) can be claimed for the portion of your home expenses attributable to the business activity. However, an ITC can only be claimed for those expenses that are subject to GST/HST— for example, heat, hydro, etc. Mortgage interest and property taxes are not subject to the tax.
Example: You’re a GST/HST registrant, and your only office is located in your home. You regularly meet with clients and conduct all your business from this location. The office space occupies 10% of the total area of the house. As such, you’re entitled to claim a deduction for 10% of the eligible home expenses incurred and ITCs for 10% of the GST/HST paid on those expenses.
You’re an employee
The rules for deducting home office expenses are more limited for employees. In this case, you’ll only be permitted to deduct costs related to a home office if your workspace is either the place where you principally perform your employment duties, or the space is used exclusively on a regular and continuous basis for meeting people while performing your employment duties.
Also, as an employee, the home office expenses you can claim are restricted. If you own your home, your deductions are limited to the maintenance of the premises, such as a portion of fuel, electricity, cleaning materials and minor repairs. You cannot deduct mortgage interest or any depreciation on your home. If you pay rent, a proportionate amount of the rent is deductible. If you’re a salesperson on commission, your deductions may include property taxes and insurance. However, other employees are not entitled to claim a deduction for these expenditures.
Like self-employed persons, you cannot create a loss from employment when claiming home office expenses. Similarly, any eligible expenses that you cannot use in one year can be carried forward to subsequent years.
Tax tip: Your employer must certify on Form T2200 that you’re required, under your contract of employment, to use a portion of your home as an office. You must keep this form in the event the CRA requests a copy of it.
If you claim home office expenses, you may also be able to claim a GST/HST rebate for the portion of your home expenses attributable to the employment activity. To qualify, your employer must be a GST/HST registrant other than a listed financial institution such as a bank, insurance company or brokerage firm.
This rebate is calculated as a percentage of eligible expenses (refer to the chart on page 77 for “Employee or partner expenses rebate”—part of topic 49). Although the rebate claim is generally filed with your income tax return, you have up to four years to file a claim.