The COVID-19 pandemic has forced many businesses to lock down their plants, offices and other business premises. As a result, many employees have been asked to work from their homes to the extent that the work can be performed remotely. This can raise questions as to the deductibility of home office expenses, including:
- Can I deduct my home office expenses for tax purposes?
- What kind of expenses are eligible for a tax deduction?
- What supporting documents do I need to claim home office expenses?
- Does my employer have to certify my expenses?
Home office deductions for employees
Employees, other than those that are commission remunerated, may deduct very limited employment related expenses on their individual income tax return if certain prescribed conditions are met. An employee earning commission or salary income may deduct home office expenses that relate to use of a work space in the employee’s home if the employee is required to pay for these expenses under his employment contract or as required by his employer. Further, one of two other conditions must also be met:
- The work space is where the employee ‘principally’ (more than 50 per cent of the time) performs the duties of his office or employment, or
- The work space is used ‘exclusively’ for the purpose of earning employment income and it is used on a regular and continuous basis to meet with customers or clients in the course of performing employment duties.
With respect to the first condition, ‘principally’ is generally determined over the course of the full period of employment in the calendar year, rather than just the part of the year the employee is required to work from home. In the current COVID-19 pandemic, as the legislation and guidance is worded, if employees are only required to work from home for less than 50 per cent of the year, they may not be able to deduct their home office expenses. Depending on the particular facts, it may be that an employer approves overtime or different working hours, which would have an impact on this 50 per cent threshold calculation.
Under the second condition, unlike the first condition, which permits occasional use of the space for other purposes by the employee or family members, the workspace must be used exclusively for work. The CRA takes a view that ‘meeting with customers or clients’ generally means a physical encounter of two or more people, face to face by accident or design. The CRA also recognizes that some informal Tax Court of Canada decisions have held that this phrase may include meetings held by phone; however, the CRA stresses that informal Tax Court decisions are not precedent setting and therefore not binding on the CRA. Virtual meetings through Zoom, Google Hangouts or other software applications that enable remote work while respecting physical distancing during a pandemic may, therefore, not be counted in determining the regularity and continuity of meetings for purposes of the second condition.
Eligible home office expenses
If the above conditions are met, the deductible home office expenses include: utilities, maintenance, home supplies, and minor repairs. However, employees cannot deduct insurance or property tax unless they are commission remunerated employees. In all cases, mortgage interest and capital cost allowance are not deductible.
In calculating the percentage of home expenses that are deductible, an employee should use a reasonable basis such as the square footage of the workspace area as a proportion of the total finished area (including hallways, bathrooms, kitchens, etc.).
It may not always be appropriate to use a percentage to allocate a portion of the home maintenance costs to an employee’s home office expense. If the expenses paid (such as cleaning materials or paint) were to maintain a part of the house that was not used as a workspace, none of those expenses should be allocated to the home office expense. On the other hand, if the maintenance costs were incurred only for the workspace, then all or most of the expenses should be included as home office expenses.
If the employees are living in a rented home or apartment, they can deduct a proportion of the rent as well as any maintenance costs paid that relates to the workspace.
The amount of the home office expenses that an individual can deduct in a tax year is limited to the amount of employment income the individual received in the year. If the expenses exceed the employment income earned in the year, the employee can carry forward those expenses and deduct them in the following year against employment income received from the same employer. Home office expenses, which were, or will be, reimbursed by the employer are not deductible.
Employers will need to sign Form T2200 Declaration of Conditions of Employment asserting that the employee was required to maintain a workspace at their home. However, this form is not conclusive or determinative if the evidence proves otherwise. The form is not filed with the employee’s personal income tax return, but rather must be kept on file should CRA request it. By signing the form, the employer certifies that the employee meets the conditions prescribed in the Income Tax Act. It follows that the best course of action is for the employer to be reasonably certain that the employee meets the conditions before signing Form T2200. For the employee to claim the deduction, however, he must be able to demonstrate that the requirements have in fact been met.
Start tracking eligible home office expenses now
The list of deductible home office expenses for non-commission employees may be limited, but every penny can be worth saving in uncertain economic times. Employees should maintain records of their eligible home office expenses and approach their employers about completing Form T2200 to support deductions taken in respect of work from home policies established in response to COVID-19.