Can I Deduct Home office expenses?

There is a bit of mis-information floating around about deducting home office expenses. Either people are not claiming all the eligible expenses or they are claiming expenses when they shouldn’t.

Here’s a brief outline of the requirements for deducting your home office:

Sole Proprietorships and Partnerships – Business Use of Home:

Meet ONE of the following conditions:

    • It is your principal place of business; or
    • You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

You can deduct part of your maintenance costs such as heat, home insurance, electricity, and cleaning materials. You can also deduct part of your property taxes, mortgage interest, and Capital cost allowance (CCA) (watch out for recapture rules when you sell the house – I rarely recommend deducting CCA). Use form T2125 Statement of Business or Professional Activities

If you rent your home, you can deduct the part of the rent and any expenses you incur that relate to the workspace. Business use of home expenses cannot create or increase a loss, only reduce income to zero. Any remaining expenses can be carried forward indefinitely.

Corporations – Business Use of Home:

Meet one of the above conditions AND charge the corporation rent for the exact amount of the annual expenses. The rental income and expenses are reported on your personal tax return (of the shareholder) and then the rent payment is deductible to the corporation. Use form T776 on your T1 personal tax return and enter the rental expense on schedule 125 statement of income and expense of the T2 Corporate Tax Return.

Commission employees – Work Space:

Meet ONE of the following conditions:

    • The work space is where you mainly (more than 50% of the time) do your work.
    • You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.

You can deduct the part of your costs that relates to your work space, such as the cost of electricity, heating, maintenance, property taxes, and home insurance. However, you cannot deduct mortgage interest or capital cost allowance. Use form T777 Statement of Employment Expenses on your tax return. Keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.