Employee home office expense deduction simplified
TAX ALERT |
Can employees’ home office expenses be deducted during COVID-19? We raised this question at the start of the pandemic and have now received certain clarifications from the government. Subsequent to the announcement in the Fall Economic Statement, the Canada Revenue Agency (CRA) issued guidance for claiming home office expenses. A new, simplified temporary flat rate method may be used by employees to calculate and claim home office expenses, without the need for an employer’s certification or supporting documentation. The detailed method is still an available option, and the claim process has been relaxed with the introduction of simplified Form T2200s and T777s.
Overview of traditional detailed method
Previously, both the Income Tax Act and the CRA’s administrative policies established narrow circumstances under which an employee could deduct home office expenses: the workspace is either (i) the place where the employee principally (i.e., more than 50% of the time) performs the employment duties or (ii) used exclusively for the purpose of earning employment income and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the employment duties. Further, these expenses were required to be paid by the employees as stipulated by an employment contract or the employers. Administratively, employees had to maintain records of their eligible home office expenses and employers were required to certify on Form T2200 that employees were eligible to claim home office expenses.
Following stakeholders’ feedback on the administrative burdens this process would result in especially in a pandemic, the CRA provided timely and temporary administrative relief for claiming home office expenses for employees work from home due to COVID-19. Revenu Québec also announced that it will follow the same approach as the CRA for employees filing Québec returns.
New temporary flat rate method
Employees who worked from home (either required by their employers or have the option to do so) for more than 50% of the time over a period of at least four consecutive weeks in 2020 due to COVID-19 are eligible to use the temporary flat rate method to calculate home office expenses. This method can still be used even if employers reimburse some but not all of the home office expenses and the claim amount will not be reduced by the amount reimbursed. This method can only be used for the 2020 taxation year.
It worth noting that CRA had previously provided a view that the reimbursement of office supplies such as personal computing equipment, office desks and chairs not exceeding $500 that are mainly for the benefit of the employer will not be treated as taxable benefits. A general allowance paid to employees would be, on the other hand, a taxable benefit.
Provided the eligibility criteria are met, employees can claim $2 for each day working from home in 2020, up to a maximum of $400. For purposes of counting the days worked at home, a work day is considered to be one that an employee worked either full time or part time hours from home. Days off (including weekend days or other days on which no work was performed), vacation days, sick leave days and other leaves or absences would not count as workdays.
Under this method, other employment expenses such as motor vehicle expenses, tools and parking will not be deductible. The benefit of using this method is that employees are not required to keep documents to support the deductions and the employers are not required provide certification on Form T2200 or simplified Form T2200s.
Employees can still choose to use the detailed method to claim the home office expenses, however the criteria for eligibility is slightly more stringent. In addition to the eligibility conditions applicable to the temporary flat rate method, the following requirements must also be satisfied:
- Employees are required to pay for expenses related to the home working space; and
- Employers will have to complete and sign Form T2200s or T2200.
Because this will be many taxpayers’ first experience claiming home office expenses, the CRA has provided a detailed list of eligible and non-eligible work-space-in-the-home expenses. Among other things, mortgage interest, principal mortgage payments, capital expenditures such as furniture, furnace, flooring and wall decorations are not deductible. As for office supplies and phone expenses, any expenses that are capital in nature are not deductible. Under this method, amounts reimbursed by employers cannot be claimed as deductions.
Expenses that are not entirely related to one’s work space must be prorated based on the number of hours and the portion of the space that was used to work. The CRA has also provided a calculator to help taxpayers determine eligible expenses.
How to make the claim
Under both the temporary or detailed methods, if employees are only claiming home office expenses in 2020 due to COVID-19, Form T777s should be used to calculate the claim amount and attached to the 2020 individual income tax return. If an employee is also claiming other employment expenses, Form T777 should be used instead.
Under the detailed method, employers must certify on Form T2200s or Form T2200 that the employees have met the eligibility criteria to claim home office expenses. Form T2200s and Form T2200 are not required to be submitted with the tax returns.
For employees who worked from home and were being certified by employers on Form 2200 before the pandemic, the traditional method must continue to be followed and neither the temporary nor the detailed method would apply. Form T2200s is only applicable to employees who incurred home office expenses due to COVID-19.
Multiple people working from the same home can each make a claim and each has the option of choosing the method that would yield the most beneficial deduction. For employers who may have many employees wishing to use the detailed method, the CRA is willing to accept a pre-signed pdf of Form T2200s, provided the information provided is accurate and the employee can produce supporting information to the CRA upon request.
Compliance burdens alleviated
As 2020 comes to an end, the uncertainty around the home office expense deduction for many Canadian employees and employers has been resolved. It is expected that employees with modest home office expenses will prefer the temporary flat rate method due to its simplicity.
However, the compliance burdens have not been completely eliminated or addressed. Employees who have incurred eligible expenses in excess of the $400 limit under the temporary flat rate method (for example, employees who have worked for more than 200 workdays in 2020 due to COVID-19 or who live in metropolitan areas where rent and living expenses are higher) may still wish to opt for the detailed method. Similarly, employers with high concentrations of such employees will need to issue potentially dozens or hundreds of Forms T2200s.