Claiming Business Use of Home

Do you earn money working from home? Whether you are self-employed or an employee, if you meet conditions laid out by Canada Revenue Agency, you may be able to deduct some of your housing operating costs against income earned.

A person whom operates a business as a proprietor or as part of a partnership can claim a portion of their home expenses if the home is used to conduct the business operations. A claim cannot be made unless at least one of the two specific restrictions are met: 

1. The work space is your principal place of business.
2. The work space is used exclusively for the purpose of earning income and is used on a regular and continuous basis for meeting clients or customers.

To clarify, if the only place you have business activities is in your home, you qualify to deduct expenses even if the work space doubles as personal living space. If you have another work location outside of your home, a claim for home expenses is available only if the work space is not used for personal living.

If you meet one of the two requirements above, you will be allowed to deduct a portion

of the normal household expenses which include taxes, insurance, interest, utilities, and perhaps repairs if they relate to the work space. The normal basis for determining the business portion is on a square footage basis. Your total home footage is 1500 square feet and you use 300 sq. ft. for your work space enables you to deduct 20% of your expenses. You should be ready to defend this determination with a detailed drawing etc. if Canada Revenue Agency asks for your calculations.

Repairs to the work space such as painting, shelving flooring or lighting to name a few may be directly claimed as a business expense and not claimed as part of home expenses. Office supplies and cleaning supplies for the work area will also be claimed as direct expenses. Repairs and normal household cleaning and other expenses are not usually deductible. The purchase of printers, computers and other office furniture and equipment will be deducted as business expenses or depreciated depending on the costs.

The question is often asked if depreciation can be claimed. The simple answer is that is not recommended as it impairs your ability to sell your principal residence without facing potential tax implications.

An employee who works from or uses their home has greater restrictions than a home based business. You must meet one of the following conditions:

  1. You mainly do more then 50% of your work in the work space.
  2. You use the workspace exclusively to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers or other people in the course of your employment duties.

You must have Form T2200 Declaration of Conditions of Employment completed and signed by your employer. You may deduct all the operating expenses as the home based business, however you may not deduct mortgage interest costs.

Upon qualifying you may now deduct the calculated business home expenses from your business income. However, you may only deduct the expenses to the extent that you have a profit. For instance, in the first year of operation you have a profit of $500 and $700 of home expenses. You deduct $500 to have a nil income and $200 of home expenses carried. This carry forward does not expire but must be deducted at the first opportunity. Be advised that if you change your business activities from one style of business to another you cannot claim your carry forwards against the new business income. There are more specific rules for day cares and bed and breakfasts.

As in most cases, you should always refer to your professional tax advisor to ensure that you are following the required tax regulations.