Hundreds of thousands of Canadians transitioned to working from home when the COVID-19 outbreak was declared a pandemic. If you’re one of them, you know that working from home comes with its own costs (heating, electricity, maintenance).
As a small business owner, you can deduct expenses for the business use of a work space in your home.
But what about your employees? Will they be able to claim work-space-in-the-home expenses to lower their tax bill?
Many groups have been lobbying the Canada Revenue Agency (CRA) to relax the work-space-in-the-home rules, since public health authorities urged Canadians to stay home since March to prevent the spread of COVID-19, and many employees transitioned to remote workers.
Right now, if an employee wants to claim work-space-in-the-home expenses, certain conditions must be met.
- They must have a dedicated workspace in the home.
- Their employment contract must outline the need to pay for their own expenses.
- They must have worked from home for a minimum of six months.
- As their employer, you’ll need to fill out and sign a T2200 (Declaration of Conditions of Employment) they must submit when they file their taxes.
There hasn’t been any indication so far that the CRA will relax those rules for 2020, even though remote employees across the country will likely continue to work from home so for many more months (or even permanently).
FBC is keeping an eye on all announcements from Ottawa and we’ll keep you updated if anything changes.
In the meantime, we’ve outlined the current rules surrounding work-space-in-the-home expenses, what paperwork your employees will need and how they can claim this expense on their tax return.
How do my employees claim work-space-in-the-home expenses?
An employee can only claim a home office expense when they are required to pay for it by their employer as part of their contract of employment, and the employer won’t be reimbursing the costs.
The employer must fill out and sign a T2200 form for each remote employee.
Also, each remote employee must meet one of the following conditions:
- The workspace is where they mainly (more than 50% of the time) do their work.
- The workspace is only used to earn employment income (no personal use). The employee also must use it on a regular and continuous basis for meeting clients, customers, or other people in the course of their employment duties.
How to calculate work-space-in-the-home expenses
To calculate the percentage of work-space-in-the-home expenses the employee can deduct, they must calculate the percentage of their home used for work, and apply that percentage to the tax deduction.
For example, if they’re living in a 1,000-square-foot house, and their office is 100 square feet, they are using 10 per cent of the home for business use. That means they can deduct 10 per cent of their expenses.
Work-space-in-the-home expenses your employees can deduct
The employee can deduct the part of the costs that relates to their workspace, such as the cost of electricity, heating, and maintenance.
However, they cannot deduct mortgage interest, property taxes, home insurance, or capital cost allowance.
Your employees need to be careful about what they expense. For example, they can’t deduct repairs or maintenance costs (such as cleaning materials or paint) used to maintain a part of the house that was not used as a workspace.
But if the expenses are specifically for only the workspace, then they may be able to deduct all or most of them.
If they are paying rent If the office space is in a rented house or apartment where the employee lives, they may deduct the percentage of the rent as well as any maintenance costs related to the workspace.
Limitations on expenses
The amount that may be deducted for work-space-in-the-home expenses is limited to the amount of employment income remaining after all other employment expenses have been deducted. This means that the employee cannot use workspace expenses to create or increase a loss from employment.
The employee may only deduct workspace expenses from the income to which the expenses relate and not from any other income.
One year carry forward provisions
If the employee cannot deduct all the workspace expenses in the year, they may carry forward the expenses. They can deduct these expenses in the following year as long as they are reporting income from the same employer.
However, they cannot create or increase a loss from employment by carrying forward workspace expenses.
For commission sales employees
For an individual who is not a commission sales employee, expenses on account of capital cost allowance, taxes, insurance and mortgage interest cannot be deducted.
For a commission sales employee who is entitled to claim expenses, a reasonable proportion of the taxes and insurance paid on a home owned by the individual is deductible including the cost of electricity, heating, and maintenance.
However, no mortgage interest or capital cost allowance can be deducted.
Supplies are limited to materials that are used directly in the performance of the duties of the employment, but are not subject to the limitation related to a workspace in a home.
Supplies will usually include such items as:
- Long-distance telephone calls and cellphone airtime that reasonably relates to the earning of employment income and
- Various stationery items (other than books), such as pens, pencils, paper clips and charts
Supplies do not include:
- The monthly basic service charge for a telephone line
- Amounts paid to connect or licence a cellphone
- Special clothing worn by employees in the performance of their duties and
- Any types of tools which generally fall into the category of equipment
Keep on top of paperwork
Your employees should organize their receipts. And keeping a simple spreadsheet to add up office expenses throughout the year will make things easier come tax time.
If their T2220, receipts or other supporting documents are not filed with the return of income, such as when the return is e-filed, they should still kept in their records and readily available as the CRA has the authority to request them as proof of the claims being made or in support of the information being reported.
If you’d like to learn more about how FBC can support your business, call us at 1-800-265-1002 or email email@example.com. Unlimited consultation related to tax matters is a key benefit of FBC Membership. You can also book an appointment online.