With the spread of the COVID-19 pandemic, many Canadians unexpectedly found themselves working from home and wondering whether they could deduct home office expenses on their income tax returns.
In response to these unique circumstances, the Canada Revenue Agency (CRA) has issued guidance and new forms for claiming home office expenses for the 2020 tax year. This article explores the existing tax provisions and temporary alternative measures.
When are home office expenses deductible?
Traditionally, taxpayers have been entitled to deduct home office expenses from employment or self-employment income where all of the following conditions are met:
- The employee’s contract of employment requires them to maintain a home workspace and to pay the related expenses;
- The employee has received a signed form T2200 – Declaration of Conditions of Employment from their employer; and
- The workspace is where the employee “principally” (more than 50% of the time) performs their duties of employment, or the employee uses the workspace exclusively for earning employment income and for regularly meeting customers or clients.
Eligible expenses
Where the above criteria are met, an employee is entitled to claim the following expenses as they relate to the home office space:
- Electricity
- Heat
- Water
- Internet access fees
- Maintenance and minor repairs
- Rent
In addition to the above, commissioned employees may also claim home insurance, property taxes and leasing costs for certain electronic equipment including cell phones, computers and tablets.
The above is not an exhaustive list. The CRA identifies on its website additional costs that may be eligible as expenditures.
Calculating expenses: The detailed method
The detailed method of calculating expenses allows employees to deduct the actual expenses incurred, pro-rata, for:
- the proportional size of their home workspace relative to the total finished area of the home and
- the portion of the year the space was used for employment purposes.
This is done to exclude the personal portion of home expenses. For example, where the space used for employment purposes for the entire year represents 10% of the home’s square footage, 10% of the eligible expenses may be deducted from income. Where multiple eligible employees share a workspace within the same home, the same expense cannot be claimed in full by more than one employee, but must be shared.
Costs which relate exclusively to the workspace, such as office supplies, do not have to be calculated using the pro-rata method and can generally be deducted in full.
Using the detailed method requires employees to track and itemize their expenses and to keep the related receipts. The CRA regularly conducts limited-scope reviews and audits of an employee’s deductible expenses and may request the supporting documentation.
What changed for 2020?
Acknowledging the vast number of employees working from home in 2020 who may be unable to meet the above criteria, the CRA has temporarily simplified the requirements. For 2020, an individual will be considered eligible to claim home office expenses where:
- The employee worked from home in 2020 due to the COVID-19 pandemic;
- The employee worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020; and
- The employee was not reimbursed for their deductible home office expenses.
The CRA has also introduced a new and temporary flat-rate method of calculating the portion of home office expenses eligible for deduction. For the vast number of employees who were neither prepared to track their home office expenses, nor familiar with which expenses qualified, this is welcome news. In addition, the CRA has introduced a simplified version of form T2200 to ease reporting for individuals who continue to use the detailed method.
Temporary flat-rate method
Using this method, employees may claim $2 per day worked at home up to a maximum of $400. Where multiple eligible employees work from the same home, each may claim up to the $400 maximum without reduction for shared spaces and expenses. This can increase a household’s overall tax deduction. The temporary method does not require expense tracking or retaining expense receipts.
Which method to use
Maximizing the available deduction may depend, in large part, on the expenses you are eligible to claim.
For example, John paid $17,100 in rent over the course of 40 weeks while working from home and uses 150 square feet of his 750-square-foot apartment (20%) as his home office. During that time, he worked an average of 40 hours per 168-hour week (24%). John’s available deduction would be approximately $820 ($17,100 x 20% x 24%). If John used the temporary flat-rate method, his deduction would be restricted to $400.
Now assume Jane is a homeowner who incurred $3,600 of eligible expenses over the same 40-week period as John. Her home office is 300 square feet out of 3,000 square feet total (10%) but is used exclusively for work purposes (i.e., no personal use). Jane’s available deduction would be $360 ($3,600 x 10%). If Jane had used the temporary flat-rate method, her deduction would have been $400.
For an individual with higher costs (such as rent) and a proportionally larger home office, the detailed method may be superior, and vice versa. Calculations aside, you may favour the simplicity and lack of documentation necessary for the temporary flat-rate method.
For more information, please contact your Odlum Brown Investment Advisor or Portfolio Manager.
Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited, offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients. The tax filing information included herein is for general information only. We recommend you consult your personal tax advisor for guidance in completing your tax return.