A growing segment of the Canadian population is self-employed and many are operating their business from their homes. Whether you are sole-proprietor or a corporation, the potential to deduct your home office expenses is an important issue and it is a question we are often asked by entrepreneurs. In practice, deducting the cost of your work space in your home is allowed if you meet one of the following conditions:
– The work space is your principle place of business (more than 50%).
– It is used on a regular and continuous basis to meet your customers and clients.
Meeting one of these conditions will depend on the facts of your situation. Generally, if you conduct most of your business operations from home, including back office and administrative tasks, you would meet the criteria.
If one of the conditions is met you will be able to deduct a reasonable portion of your eligible home office expenses.* Eligible expenses include:
- Interest on your mortgage
- Utilities including water, heat, gas and electricity
- Property taxes
- Condo fees
*Tax tip: Note that you cannot use these expenses to create or increase a loss for the year but can carry it forward to another taxation year.
A reasonable deduction would be based on the size of your work space relative to the size of your home (excluding bathrooms, kitchens and hallways). For instance, if you paid $10,000 in mortgage interest for the year and your work space occupied 200 square feet of a 1000 square foot home, you would deduct mortgage interest of $2,000 from your business income (200/1000 = 20%, 20% X $10,000 = $2,000).
Tax Tip: Other Home Office Related Expenditures
Other expenditures used in your work space such as furniture, computers, printers can be written-off through the CCA process. In addition, current business expenses such as office supplies and your business phone are deductible in the year they are incurred. These assets and expenses would be fully deductible as long as they relate only to your business and are not for personal use.
Tax Tip: CCA on your Home
Although you can deduct CCA on the portion of your home related to your work space, this is generally not recommended. If you sell your home in the future or discontinue the business, you will have to include all the previous CCA deductions into income as well as report a portion of the capital gain on the home if it appreciates in value.
Tax Tip: Employees
If you are an employee and you meet one of the conditions above, that is, your home is your primary place of business or where you regularly or continuously meet your clients, you are eligible to claim home office expenses as well. However, as an employee the eligible expenses are more limited and your employer is required to complete T2200 on your behalf.
If you work primarily from your home you can claim a reasonable portion of your home office expenses. As Chartered Accountants in Toronto and Mississauga we recommended you seek professional advice to ensure you deduct all home office expenses you are entitled to claim. Contact a Chartered Accountant for more tax tips by email at firstname.lastname@example.org or call us at 647-725-2537 for consultation.