The COVID-19 pandemic has forced millions of people into working from home for a prolonged period. As a result, many people have converted part of their homes into workspaces, from employees of large companies to small business owners. To ensure a practical work environment at home, many Canadians have invested in new equipment such as a new computer or laptop, accessories, and furniture.
This workplace shift has also increased maintenance expenses including electricity and heating costs for everyone since we are now home much more than before. While some people may have been lucky enough to have their employers cover or subsidize these expenses, a significant portion of people has had to incur the costs associated with setting up a home office themselves. However, many if not all of these expenses can be used to reduce your 2020 tax bill because the Canada Revenue Agency (CRA) allows for deductions for many of these costs.
Deducting Home Office Expenses During Covid
In response to the unprecedented challenges due to COVID-19, CRA has introduced a new temporary “flat” calculation method to simplify claiming the deduction for home office expenses for the 2020 tax year.
What’s new under the temporary flat method?
The new temporary flat rate method allows a worker to claim $2 for each day worked from home during 2020,plus any additional days you worked at home due to the COVID-19 pandemic. The maximum you can claim using this method is $400 (200 working days) per individual.
You are eligible to claim a deduction for home office expenses for the period you worked from home, if you meet ALL of the criteria:
- You worked from home in 2020 due to the COVID-19 pandemic or your employer required you to work from home.
- You worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020
- Have a completed and signed Form T2200S or Form T2200 from your employer (only applicable if detailed method (see below) is used to complete the claim)
- The expenses are used directly in your work during the period
**It is important to note that this method is a special case, for time worked at home during Covid. Under normal circumstances, only the detailed method described below can be used to claim home office expense deductions.**
The Normal Rules for Deductions of Home Office Expenses
What are “business-use-of-home expenses”?
You can claim tax deductions on the additional expenses that you incur in order to operate your business from home. These are the expenses that would not have arisen if there was no pandemic-driven lockdown and had you been conducting your business from the office.
Are you eligible for a “business-use-of-home expenses” tax deduction?
You need to meet one of the following conditions to be eligible for the business-use-of-home expenses tax deduction:
- Your home is your principal place of business.
- You use the workspace at home only for business income and to meet customers, clients, and other work-related people regularly.
In order to claim the deductions for these expenses, you will need to fill the ‘Calculation of business-use-of-home expenses’ section of form T2125, Part 7, to determine the amount of your deduction. The expenses that you claim in this section cannot be claimed anywhere else on the form.
How to Calculate Business-use-of-Home Expenses
To calculate the amount of business-use-of-home expenses that you can deduct from your taxable income, you will need to determine the percentage of space in your home that you are using for your business. For example, your house spans 1,500 square feet, and you are using 150 square feet of that space for your business, then you can deduct 10% of all the expenses incurred under the business-use-of-home expenses.
Which business-use-of-home expenses can you deduct?
You can deduct telephone and internet charges, electricity costs, maintenance expenses, and heating costs related to the space used for business. You can also deduct a percentage of capital cost allowance (CCA), home insurance, property tax, and mortgage interest according to the percentage of the home that you use for business. However, you cannot deduct mortgage payments from your taxable income. If you live in a rented apartment, you can deduct the percentage of rent related to the space used for business.
Let us understand all these calculations through an example. Going back to our previous example, we calculated that you use 10% of the area of your house for your business and pay the following each month for regular expenses:
- Electricity bill – $100
- Maintenance expense – $500
- Heating cost – $50
- Telephone charges – $100
- Rent – $2,000
- Rental insurance – $50
These expenses add up to $2,800 each month.
Let us assume that you earn $10,000 every month, from the business that you carry out from your home. Since the space at home used for business accounts for 10% of the entire area of your house, you can deduct 10% of the aforesaid expenses from your taxable income. In our example, 10% of the expenses total $280. You can deduct this amount from your income of $10,000 under the business-use-of-home expenses allowance. After the deduction, your taxable monthly income comes to $9,720 ($10,000 – $280). On an annual basis, the total allowable deduction would be $3,360, assuming the same monthly expenses for each month of the year.
How can your laptop reduce your tax bill?
If you are operating a business from home, be it full-time or part-time, there are certain things you will need to operate smoothly. These commonly include a desktop computer or laptop and appropriate office furniture, among other items. The CRA gives capital cost allowance (CCA) for investments made in capital assets such as machinery, furniture, buildings, vehicles, and equipment. Under the CCA, you can deduct the depreciation cost of the laptop, chair, and table from your taxable income.
Let us assume, you spent $2,000 to buy a laptop, $1,000 on a work desk, as well as paid $500 to install an antivirus program to protect the data on the laptop. If the depreciation rate is 10%, then you can deduct depreciation cost of $200 ($2,000 x 10%) and $100 ($1,000 x 10%) for the laptop and work desk, respectively. You can also deduct the $500 that you paid for the antivirus as it is the expense you incurred to improve the security of your business asset (laptop). In total, you can deduct $800 in CCA.
Points to remember:
- The business-use-of-home expenses cannot exceed your business income before deducting these expenses.
- The business-use-of-home expenses can be deducted only from the business income for which these expenses were incurred and not from other income.
- You can carry forward your business-use-of-home expenses into 2021 if you are unable to deduct all of them in 2020.
- In no situation can you use business-use-of-home expenses to create or increase a business loss.
At Sloan Group LLP, our team of accounting professionals are dedicated to delivering reliable solutions to our clients and identifying the best solutions to mitigate tax obligations. If you would like to discuss how partnering with us could benefit you or your business, contact us to schedule a consultation. Please reach out to us online, or by phone at 416-665-7735.