A Guide to Home Office Expenses
Remote work, a model that existed before COVID-19, saw rapid adoption during the pandemic and has proven its staying power beyond widespread lockdowns. In 2016, only 4% of Canadians worked from home. Today, that number has jumped to 20%. This shift has significant implications when tax season rolls around.
With more Canadians working from home and engaging in freelance or contract work, the government has had to update legislation and implement effective tax measures.
Tax Considerations for Hybrid and Remote Employees
During the pandemic, over 40% of the Canadian workforce was required to work from home. In response, the government introduced two tax deduction options for remote workers: the temporary flat rate method and the detailed method.
The Temporary Flat Rate Method Introduced in 2021 and extended to the 2022 tax year, this method allows a $2.00/day claim for each day worked from home, up to $500 (for 250 working days). To be eligible, an employee must have worked from home for more than 50% of the time for at least four consecutive weeks due to the pandemic. This amount can be claimed on Form T777S and added as a deduction on your income tax return on line 22900 ("other employment expenses"). Remember to exclude statutory holidays, sick days, and vacation days from your calculation of 'days worked from home'.
The Detailed Method The detailed method requires claimants to meet specific criteria:
1. Worked from home in 2022 due to the pandemic (this applies whether your employer gave you the choice or not and does not need to be part of your employment contract).
2. Spent more than 50% of the time in your home workspace for at least four consecutive weeks in 2022.
3. Have a completed and signed copy of Form T2200S or T2200 from your employer.
Using this method, you can claim a portion of home-based expenses as outlined by the Canada Revenue Agency (CRA).
Tax Considerations for Business Owners
The CRA specifies that if you use part of your home for both business and personal living, tax-eligible deductions can be calculated based on the proportion of time the space is used for business versus personal use. Calculate how many hours a day the space is used for business, divide that amount by 24 hours, and then multiply by the business portion of your total home expenses.
Eligible vs. Ineligible Home Office Expenses
Determining eligible versus ineligible tax deductions can be complex and may vary based on your industry and profession. It's best to consult with your accountant. For remote working employees, eligible expenses include heat, water, internet, electricity, property taxes, garbage, and recycling pickup, as well as mortgage interest for homeowners. To calculate the deductible amount, determine the percentage of your home used for business, then apply that percentage to your total home expenses.
Example Calculation: Stacey is a management consultant living in a 2,000 square foot home. Her 300 square foot office (15% of her home) is solely used for business. Her annual household expenses total $8,000.
300 square feet / 2,000 square feet = 0.15 0.15 x $8,000 = $1,200
Stacey can deduct $1,200 in household expenses as Business Use of Home Expenses against her business income. Note that if she incurs a business loss, these expenses cannot increase her loss but can be carried forward to future years.
It’s important to note that the principal portion of the mortgage is not deductible. If the space is used for both personal and business purposes, the deductible percentage must be adjusted accordingly.
Your Best Bet for Navigating Tax Season
To ensure compliance with the CRA and maximize your tax deductions, work with your trusted advisor – your accountant. Filing taxes can be complex, and having a qualified accountant can provide invaluable peace of mind. They understand the intricacies of CRA regulations and can help minimize potential problems.
At WealthCo, we are committed to providing you with the information and support you need to make informed financial decisions. Contact us today to learn more about how we can assist you during tax season and beyond.
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