Deducting home expenses

The decision to use part of your home as a place of business is usually based on individual needs and preferences. The decision may be financial (to ease the burden of rental overhead for example) or because of personal attitudes towards commuting or for flexible working hours. Either way, if you establish your business in your home, you may be entitled to deduct certain expenses related to maintaining and operating your home.

This discussion of the deduction of home expenses does not apply to situations where you are an employee of a business. The deduction of home expenses by an employee is a topic outside the scope of this discussion.

To claim a portion of your home expenses you are required by Canada Revenue Agency to meet one of two tests:

1. The work space in your home must be your principal place of business,

or

2. The work space in your home is used exclusively for earning income from business and is used on a regular and continuous basis for meeting customers,
clients, or patients.

What Items Qualify as Expenses?

Assuming you meet one of these two tests you may deduct expenses applicable to the part of your residence used for business. Rent, gas, electricity, insurance, water, property taxes, interest on your mortgage, and common area repair and maintenance costs are common examples.

These expenses are most easily accounted for when they are apportioned between business and personal use. The most common method of apportioning these expenses is on a square footage basis. For example, if your business occupies 25% of the total square footage of your home, you should be able to deduct 25% of the expenses.

Can You Claim a Business Expense for Depreciation or Capital Cost Allowance on Your Home?

The simple answer to this question is yes! However, it is not normally a recommended course of action. The reason is that if you eventually sell your home, the business portion of your home may not be eligible for the principal residence exemption. This could mean that you have to pay tax on the depreciation previously deducted and capital gains tax on any appreciation of the business portion of the house.

Is there a limit to the amount that can be deducted?

In addition to the above qualifications, you are subject to a limitation on the amount of home expenses you may claim. The amount of expenses you are permitted to claim is limited to your net income from the business before deducting any amount for work space in your home. In other words, you cannot create a loss by claiming home expenses. In the event you cannot claim the home expenses because it would create a loss, then there are rules that enable you to carry unused home expenses forward to a subsequent year.

Other Considerations

Any decision by Canada Revenue Agency to allow or disallow a claim for home expenses (or any expenses for that matter) may be influenced by your ability to demonstrate a pursuit of profit. For example, do you have a business license, or a separate business telephone? Do you have a sign on the home announcing the business? Is the business space entirely separate from the family living area? These are just some of the factors that should be considered before claiming home office expenses.

The deduction of home office expenses, when available, provides an opportunity to reduce the taxes otherwise payable on your business’ profits and recover some of the costs of maintaining your home. If you find yourself using a portion of your home for business, it is important you talk to a tax professional to ensure you are claiming the maximum deduction possible without exposing yourself to an unacceptable level of risk.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.