The working world has changed drastically since March 2020, with many opting for the comforts of a home office over office environments due to fewer distractions and interruptions. This can lead to greater focus and productivity. Working from home has the added bonus of eliminating the cost of commuting and associated costs, such as meals and clothing. It also offers a degree of freedom that isn’t available in the traditional office environment, with the ability to control your own hours and where you work. This can reduce stress levels and improve overall health, allowing more time to spend with family and friends, and access to healthier foods and exercise. As a small business owner in Canada, a home office can be a great way to save on overhead costs and maximize efficiency. It is important to understand the rules around home office tax deductions in order to get the most out of your working setup.
The following criteria provided by the Canadian Revenue Agency will help you evaluate your eligibility to deduct home office expenses as a small business owner:
- Your home is your principal place of business
- You use your office space only to earn your business income regularly and ongoing basis to meet your clients, customers, or patients
How to Calculate Your Deductions
Once you have determined that you are eligible to claim home office expenses, you can start to calculate the amount of your deduction. Generally, you can deduct a portion of your rent or mortgage payments, property taxes, insurance, utilities, repairs and maintenance expenses, and other costs related to your home office. To decide what percentage of your expenses you can use as a deduction, divide the area of the workspace (the space where you work) by the total area of your home to calculate the portion of the workspace you can deduct from your taxes.
For example, if your home office is 100 square feet and your home is 1000 square feet, you are using 10% of your home to operate your business so you can deduct 10% of your home office expenses.
If the same part of your home is used both for business and personal living, you can calculate how many hours a week you use that space for your business and how many hours you spend for personal use. This way you can calculate an accurate percentage of your expenses that can be deducted from your expenses.
It is important to note that you cannot use your deductions for business-use-of-home expenses to create a loss for your business. The amount you can deduct for these expenses cannot exceed the net income of your business before these expenses are subtracted.
What can be claimed for home office expenses?
The following Business Use of Home expenses are eligible for deduction:
Salaried Employee and Commission Employees
- Rent Payments
- Mortgage Interest (principal payments are excluded)
- Property taxes
- Portions of Utilities portion (electricity, heat, and water)
- Condominium/ Strata fees
- Home or Renter’s Insurance
- Maintenance and minor repair costs
Commission Employees Only
- Home Insurance
- Property Taxes
- Lease of a Cell Phone, Computer, Laptop, Tablet, Fax Machine ( Items that are reasonably related to earning commission income)
Along with home expenses, the CRA also allows you to deduct some of your home office furniture and equipment, such as desks, chairs, filing cabinets, computers, and other items that are used exclusively for business purposes. However, you are not able to deduct the cost of any improvements you make to your home office, such as adding insulation or replacing drywall.
What cannot be claimed for home office expenses?
The following Business Use of Home Expenses are not eligible for deduction
Salaried Employee and Commission Employees
- Mortgage Interest
- Principal Mortgage Payments
- Home internet Connection Fees
- Capital Expenses (replacing windows, flooring, furnace, etc)
- Wall Decorations
When claiming home office deductions, you should keep detailed records of all expenses related to your home office. This includes receipts, invoices, and other documentation that can prove that the expenses were for business purposes.
What is a Salaried Employee
A salaried hourly employee is an employee who is compensated a fixed agreed upon amount each pay cheque. In these cases hours worked do not factor into the amount they are paid each month
What is a Commissioned Employee
A commissioned employee is an employee whose pay is based on revenue they generate. This amount causes their paycheck to fluctuate from week to week.
By understanding the rules and regulations around home office deductions, small business owners in Canada can benefit from the savings and convenience of a home office. LedgersOnline’s team of talented bookkeepers are here to help small business owners navigate the complexities of home office claims, ensuring the process is completed efficiently and accurately. Start your new tax year on the right foot by scheduling a call with our team to discuss the best way to maximize your return.