WRITING OFF HOME OFFICE EXPENSES
Financial planningAuthor :
Tina Tehranchian 
Tina Tehranchian, MA, CFP, CLU, CHFC, is a branch manager and financial advisor with Assante Capital Management Ltd. - member CIPF, located in Richmond Hill, Ontario and can be reached at 905-707-5220 or through her web site at www.tinatehranchian.com. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.
An office at home is important for many people because of the convenience and economy that it offers. To the extent an office is operated out of an individual’s home, a certain amount of house-related expenses may be tax deductible against the income generated.
There are three types of individuals who can claim expenses related to operating an office in their home: salaried employees, employees on commission and self-employed individuals. This distinction is important because each subsequent group is entitled to a longer list of deductible items.
In any case, the amount of deductible expenses will be limited to the amount of income earned by the activity operated out of the home office. Any eligible expenses in excess of income from this source that cannot be deducted in the year can be carried forward and deducted in a subsequent year.
The first criterion, applicable to all three groups, is that the place in the home is where the individual does the principal amount (i.e., more that 50 per cent) of his or her work, or the place is used exclusively (i.e., 100 per cent) on a regular and continuous basis to meet with customers or other persons in the course of the work.
The regular and continuous use of the space was challenged by a physician who maintained a medical office as well as an office in his home. He was able to demonstrate that he “met” with his patients by phone and regularly took phone calls in his home office.
The second issue to be addressed is the reasonable allocation of business versus personal expenses. Reasonableness is usually established by calculating the ratio of personal versus business proportion of the home. Generally square footage is used to calculate the ratio. If the home office is used for both business and personal purposes, the expenses need to be further prorated.
For example, where the home office represents 20 percent of the floor space of the home and it is used 80 per cent of the time for business use, then the overall business use proportion is 16 percent. The ratio is then applied to the total expenses of operating the home to arrive at the deductible portion.
DEDUCTIONS FOR EMPLOYEES
If the work space in your home is the location where you perform your principal duties of employment more than 50% of the time, and you are required by your contract of employment to maintain such an office, you can deduct some of your expenses.
This requirement must be certified by your employment on form T2200. You do not need to send this form with your tax return but should keep it on file in case you are questioned by CRA in the future.
You can write off a portion of your electricity, heating, rent (if a rental property) and maintenance but not property taxes, home insurance, mortgage interest or capital cost allowance.
In the case of maintenance costs, it may not be appropriate to use a percentage of these costs but rather a review should be done to determine whether the maintenance applied to the work area in the home or client access to the home.
DEDUCTIONS FOR COMMISSIONED EMPLOYEES
If you are a commissioned employee, you can deduct a few more expenses than a non-commissioned employee. In addition to the expenses allowed to a salaried employee, you can also deduct a portion of the property taxes and insurance related to the home office space. However, mortgage interest and capital cost allowance are not deductible.
Note that in order for a salaried or commissioned employee to claim expenses related to a work space in the home, the individual must be required by his or her employment agreement to incur those expenses and the employer must certify that requirement by the completion of Form T2200 – Declaration of Conditions of Employment.
DEDUCTIONS FOR THE SELF-EMPLOYED
If you are self-employed you can deduct an even greater number of expenses. You can deduct a portion of maintenance costs such as heating, home insurance, electricity and cleaning materials. You can also deduct a part of the property taxes, mortgage interest and capital cost allowance.
It should be noted that if capital cost allowance is claimed, you could be subject to tax on the recapture of the capital cost allowance claimed if the home is subsequently sold for more than its cost base and that the use of the principal residence exemption will be denied on this portion of the residence, exposing this portion to tax on any resulting capital gain.
Claiming appropriate tax deductions is an important part of tax planning and maximizing your financial position, so be sure to discuss all the opportunities available to you with a qualified tax professional.
There are three types of individuals who can claim expenses related to operating an office in their home: salaried employees, employees on commission and self-employed individuals. This distinction is important because each subsequent group is entitled to a longer list of deductible items.
In any case, the amount of deductible expenses will be limited to the amount of income earned by the activity operated out of the home office. Any eligible expenses in excess of income from this source that cannot be deducted in the year can be carried forward and deducted in a subsequent year.
The first criterion, applicable to all three groups, is that the place in the home is where the individual does the principal amount (i.e., more that 50 per cent) of his or her work, or the place is used exclusively (i.e., 100 per cent) on a regular and continuous basis to meet with customers or other persons in the course of the work.
The regular and continuous use of the space was challenged by a physician who maintained a medical office as well as an office in his home. He was able to demonstrate that he “met” with his patients by phone and regularly took phone calls in his home office.
The second issue to be addressed is the reasonable allocation of business versus personal expenses. Reasonableness is usually established by calculating the ratio of personal versus business proportion of the home. Generally square footage is used to calculate the ratio. If the home office is used for both business and personal purposes, the expenses need to be further prorated.
For example, where the home office represents 20 percent of the floor space of the home and it is used 80 per cent of the time for business use, then the overall business use proportion is 16 percent. The ratio is then applied to the total expenses of operating the home to arrive at the deductible portion.
DEDUCTIONS FOR EMPLOYEES
If the work space in your home is the location where you perform your principal duties of employment more than 50% of the time, and you are required by your contract of employment to maintain such an office, you can deduct some of your expenses.
This requirement must be certified by your employment on form T2200. You do not need to send this form with your tax return but should keep it on file in case you are questioned by CRA in the future.
You can write off a portion of your electricity, heating, rent (if a rental property) and maintenance but not property taxes, home insurance, mortgage interest or capital cost allowance.
In the case of maintenance costs, it may not be appropriate to use a percentage of these costs but rather a review should be done to determine whether the maintenance applied to the work area in the home or client access to the home.
DEDUCTIONS FOR COMMISSIONED EMPLOYEES
If you are a commissioned employee, you can deduct a few more expenses than a non-commissioned employee. In addition to the expenses allowed to a salaried employee, you can also deduct a portion of the property taxes and insurance related to the home office space. However, mortgage interest and capital cost allowance are not deductible.
Note that in order for a salaried or commissioned employee to claim expenses related to a work space in the home, the individual must be required by his or her employment agreement to incur those expenses and the employer must certify that requirement by the completion of Form T2200 – Declaration of Conditions of Employment.
DEDUCTIONS FOR THE SELF-EMPLOYED
If you are self-employed you can deduct an even greater number of expenses. You can deduct a portion of maintenance costs such as heating, home insurance, electricity and cleaning materials. You can also deduct a part of the property taxes, mortgage interest and capital cost allowance.
It should be noted that if capital cost allowance is claimed, you could be subject to tax on the recapture of the capital cost allowance claimed if the home is subsequently sold for more than its cost base and that the use of the principal residence exemption will be denied on this portion of the residence, exposing this portion to tax on any resulting capital gain.
Claiming appropriate tax deductions is an important part of tax planning and maximizing your financial position, so be sure to discuss all the opportunities available to you with a qualified tax professional.