As a result of the COVID-19 pandemic, many employers have been forced to lock down their offices, plants, and other business locations. To the extent possible, many employees are now working remotely from their homes. As outlined below, this may provide for a tax reduction opportunity for many Canadian employees in 2020.
Summary and Takeaways
Home offices have never been more popular, as millions of former office workers now work remotely. That’s means that employees with offices at home may be eligible for deductions related to the cost of a home office. It is necessary to determine the tax deductible eligibility of particular home office expenses, and then be able to sufficiently document them in the event that the deductions are questioned by Canadian tax authorities.
- The home office expenses must be directly necessary in the employee’s work, and no costs can be deducted that were or will be reimbursed by the employer.
- The office workspace has to also meet specific conditions that define it as a legitimate home office as far as tax rules are concerned.
- If those conditions are met, then salaried or commission-earning employees may deduct such things as utilities, office supplies, and rent as home office expenses.
- Employers will need to complete, sign, and retain a Form T2200 in case it is requested by the tax authorities. When offices are at home, there are also considerations regarding how the spaces are shared with others such as family members.
An employee earning salary or commission income may deduct home office expenses that relate to the use of a workspace in the employee’s home if the employee is required to pay for these expenses under his or her contract of employment. The home office expenses must be used directly in the employee’s work, and no costs can be deducted that were or will be reimbursed by the employer. Furthermore, one of the following two other conditions must be met:
- The workspace is where the employee ‘principally’ (more than 50 percent of the time) performs the duties of his or her employment, or
- The workspace 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 while performing employment duties.
Note that 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, if employees are only required to work from home for less than 50 percent of their time with the employer during the calendar year, they may not be able to deduct their home office expenses.
Note that under the second condition, unlike the first condition, which permits occasional use of the workspace for other purposes by the employee or family members, the workspace must be used exclusively for work. The Canada Revenue Agency (“CRA”) takes a view that ‘meeting with customers or clients’ generally means a physical, face-to-face encounter of two or more people. However, the CRA recognizes that some informal Tax Court of Canada (“Tax Court”) decisions have held that this phrase may include meetings held by phone, although the CRA stresses that informal Tax Court decisions are not binding. Therefore, in the current COVID-19 pandemic, virtual meetings through Zoom or other software applications may not be counted for purposes of the second condition. However, this is subject to the CRA’s interpretation.
Eligible Home Office Expenses
If the above conditions are met, both salaried and commission employees may deduct electricity, heat, water, maintenance, home supplies, minor repairs, and rent as home office expenses. Employees earning commission income can also deduct insurance and property taxes. Mortgage interest and capital cost allowance are never deductible as home office expenses.
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 their total home. However, it may not always be appropriate to use a percentage to allocate a portion of the costs to an employee’s home office expense. As an example, if the expenses paid (such as cleaning materials) were to maintain a part of the house that was not used as a workspace, none of those expenses should be reported as a home office expense. On the other hand, if maintenance costs were incurred only for the workspace, then all or most of the expenses should be included as home office expenses.
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.
Employers will need to complete and sign Form T2200 – Declaration of Conditions of Employment stating that the employee was required to maintain a workspace at their home. This form is not filed with the employee’s personal income tax return, but rather must be kept on file should the CRA request it. By signing the Form T2200, the employer certifies that the employee meets the conditions prescribed in the Income Tax Act. However, note that Form T2200 is not conclusive or determinative, and if the employee is audited, the CRA will look at all available evidence to conclude whether the requirements of a home office have in fact been met.
Employees have the responsibility to track each of their home office expenses. They must be able to produce corresponding receipts to support each expense should they be requested by the CRA.
How to Report Employee Home Office Expenses
Assuming you meet the qualifications to report your home office expenses, you have a signed Form T2200 on file from your employer, and you have produced a summary of your home office expenses incurred during the calendar year (with corresponding receipts), you should report your home office expenses on Form T777 – Statement of Employment Expenses, which will be filed along with your Canadian personal income tax return.
If you would like to discuss your specific situation with us, please contact your Cardinal Point financial advisor at your earliest convenience. We wish you all a happy and healthy quarantine!