Are you working out of your home to run your own business? Does your employer require you to have an office at home?
Having to use your home to aid in earning of income may qualify you for home office expenses that can be netted against your business income.
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 store products for sale also contributes to the legitimacy of this deduction.
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 (among other things).
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 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 space is also used some of the time as the kids’ play room or study hall, than you are suppose to reduce your office apportionment by the percentage of time it is used by the kids. Yes, I’m serious.
For those self-employed, you can also deduct proportionally the cost of your 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.
You may have noticed no mention of home phone, cell phone, cable and internet expenses. In the past these have not been allowed by CRA but times are a changing and CRA is more accepting of cell and internet costs as legit business expenses, and often cell at 100%. Land lines and cable if blended with cell and internet expenses tend to get included as legit expenses too.
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, CRA will not allow your home office expense deduction to exceed your business income earned for the year. In other words, your home expenses cannot create a business loss.
However CRA is kind enough to allow any unused balance to be carried forward and used against future business income.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him or see previous columns at ron.clarke@JBSbiz.ca