Episode 2: Working From Home
In this episode, we continued following the Frequently Asked Question series and covered WORKING FROM HOME – the pros, the cons, and that sweet, sweet tax deduction!
Canada Revenue Agency allows deductions for Office-Space-in-Home for 3 broad categories:
You're a sole proprietor (meaning you don’t have a corporation), and your main work space is home.
You’re a shareholder in a corporation, and the corporate business activities take place in your home – home office, storage, etc and so the corporation effectively rents that space from you personally (called an Office in Home or Occupancy deduction)
You’re working for somebody else, but your employer requires you to work from home at least 50% of the time.
In all 3 categories listed above, we follow the same method of calculating what percentage of your home expenses will be deductible:
Business-use space/Total livable space = Allowable deductible percentage
Example: Office space is 150 square feet, total livable space in my home is 1,000 square feet = 15% deductible percentage can be applied to the allowable home expenses (see chart below).
It is important to know that home office deductions can not be used to create or increase a business LOSS, so if your business is already at a loss or at zero, you cannot use the home deductions, BUT they can be carried forward to a future year when you are hopefully more profitable, so keep these records!
PRO-TIP: Regardless if you are a sole proprietor or a corporation, If you are in the City of Edmonton, and you run a home-based business, you are required to have an appropriate business license. If you’re not in Edmonton, do a google search on business licenses in your city to make sure you’re in compliance.
Also, advise your insurance company if you are running a business from home – even if you don’t want coverage for your business contents or liability (and you should), if there is a loss (even an unrelated one) your insurer could deny the claim based on the omission of this information.
The cost of the business license and business insurance are completely tax deductible as well, so make sure you are holding onto these receipts!
If you are a EMPLOYEE working for somebody else, there are special rules for you:
You must work at home at least 50% of the timeYour employer must complete and sign a T2200 form every year
The deduction is limited to the income from the signing employer; AND
The deduction is limited to the amount of employment income you earned from that specific employer (i.e. In 2018, your employment income from Employer X was $1,000, the most you be able to claim as office-space-in-home for that year would be $1,000. However, as above, we can carry-forward any office-space-in-home expenses to a future year if required, as long as you are still working for that same employer in the following year)
Expenses to apply the Allowable Deduction Percentage to:
*Note: Internet & Telephone would only be allowed if your employer specifically noted they were required to be paid for (and not reimbursed) on the T2200 form.
**Note: Be careful when claiming repairs & maintenance. If the repair doesn’t affect your work space, it is not deductible. If it affects the entire home (i.e. furnace or roof repair), it is claimable at the pro-rated amount. Conversely, if the repair only affects your work space, it would be fully deductible.
Also, a renovation that increases the value of your home (i.e. upgraded kitchen, appliances, flooring, etc.) would be considered a capital expenditure and needs to be deducted over the course of multiple years. If the renovation or equipment directly relates to your business space, you may claim CCA or depreciation on it.