More and more freelancers and independent contractors choose to work from home. If you use part of your home to run your business, you can deduct certain expenses, which reduces your net income and the taxes you owe.
What Can Be Deducted?
Under the Income Tax Act, there are two fundamental criteria that must be filled to be entitled to the home office deduction. First, the space you use must be your principal place of business, meaning that more than 50% of your work time is spent there. Second, the space occupied by your office or workshop must be used almost exclusively to earn business income. In other words, if you use a corner of the dining room table in the daytime, you are not eligible. However, if a distinct room in the house is dedicated to your small business, then that qualifies.
The logic behind the deduction is that if you paid rent and common services in a commercial building, then this would obviously be a deductible expense. The rule for a home office is therefore the same, but the calculations involved are a little more detailed.
As a taxpayer seeking a deduction, it is your obligation to compile, with appropriate receipts and records, all of the pertinent expenses. As a rule, qualified expenses are the following:
Interest on mortgage payments
Municipal and school taxes
Insurance
Electricity, gas, or heating oil
Repairs
Telecommunication services
General upkeep, including cleaning services and supplies
If you want, you can also deduct part of your house’s cost as depreciation. However, keep in mind that this amount may be recaptured — and taxed as income — upon resale of the house.
How to Calculate the Deduction
Next, you will need to determine the percentage of your expenses that you can deduct. There is no hard and fast rule, but you must use a method that is reasonable in light of the type of business you have, and you must apply this method consistently and coherently.
The most common method is to deduct a percentage of your home expenses that is equal to the percentage of your home’s total area used for business. For example, if your home office represents 10% of your home’s total area, then you can reasonably deduct 10% of your admissible expenses.
There are cases where the percentage area is not an appropriate method. For example, think of a small business that is run out of a detached garage or that uses a garden. Each case is different, but if the method is reasonable under the circumstances, it should be accepted by the tax authorities.
Claiming the Deduction
The amount that you can claim is limited to the total income generated by your business. Home office expenses cannot be used to generate or augment a loss. If you do not have sufficient business income to claim the full amount you would otherwise be entitled to, it can be carried forward to other years.
Finally, when preparing your tax return, you must complete Form T2125 Statement of Business and Professional Activities to claim your deduction.
References & Resources
cra-arc.gc.ca
cra-arc.gc.ca
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