Many employees and self-employed individuals work out of their home and may make legitimate claims for the cost of running a home workspace according to certain rules.
What is important is that where there is a mixed use of expenditures, a proper allocation is made for any personal use component.
1. Allowable Deductions
To be deductible, the space must be:
- used exclusively to earn business income and on a regular and continuous basis for the purposes of meeting clients of the business, or
- the principal place of business
Deductible home workspace expenses for the self-employed include:
- maintenance and repairs including light bulbs and cleaning supplies,
- property taxes,
- mortgage interest, and
- Capital Cost Allowance (CCA) (not recommended as the portion of the home on which CCA is claimed cannot be designated as the taxpayer's principal residence, with the result that that portion of the gain on the disposition of the home cannot be exempted from tax).
To determine the deductible expenses, total expenses for the costs of maintaining the home are generally pro-rated by the following fraction:
Square footage of the home workspace
-------------------------------------------------------- x Total Eligible Expenses = Deductible Expenses
Square footage of the entire living area
What is the footage of the home workspace?
You do not get to deduct hallways, bathrooms, etc. If the office space is 200 square feet, that is all you can use to prorate your expenses.
What if you use a spare bedroom as your office?
You are to prorate the space for personal use first. In other words, the spare room is 200 square feet. It is used as an office 75% of the time and the rest of the time it is a spare bedroom. You will prorate using 150 square feet.
What if I have specialized equipment in my garage that uses an unusually high amount of electricity?
You can take some components of the home workspace expenses and use a different percentage. In this example, you may be able to prove (through hydro bills before and after the installation of this equipment) electricity should be 40% while the rest of the expenses are only 10%. Be able to support your argument with facts and you will likely not run into problems.
What if I have a bed and breakfast?
The amount of separation between the taxpayer's living quarters and the business quarters will determine how it should be handled. In Rudiak v H.M.Q. (2002) (Tax Court of Canada), the court found for the taxpayers and determined they were not operating a business in their home. Therefore, they could write off their expenses on their business schedule and not treat it like a home office expense. This was good news.
The self-employed may claim these expenses, provided that they do not increase or create an operating loss. If they do, home-office expenses can only be claimed to reduce net income from the business to zero and the balance must be carried forward.
The amount carried forward from one year is deductible in the subsequent year, subject only to the same limitation in that year.