Introduction – Income Tax & The Home Office
Millions of Canadians who do not usually work from home are doing so due to the ongoing COIVD-19 pandemic. Many of these are employees who have been forced to purchase work related supplies and equipment to furnish their home office while others may have had to create a work space in their home. Yet, one common tax related question on the minds of many Canadians is whether they can deduct their home office expenses from their income when preparing their 2020 income tax returns?
The answer depends on multiple factors including, but not limited to: (a) whether the person is self-employed or an employee (b) whether (or not) the person is obligated, under his or her employment contract, to purchase supplies and equipment related to carrying out the duties and responsibilities of their employment, and (c) what constitutes work space in home expenses. Canada's Income Tax Act includes numerous provisions pertaining to the tax treatment of office or employment related expenses, many of which are precisely designed to prevent their abuse by taxpayers. For example, subsection 8(13) pertains to employees whereas subsection 18(12) pertains to self-employed individuals. For the purpose of simplicity, this article will focus on subsection 8(13) of the Income Tax Act which pertains to the work space in the home of an individual from office or employment. Office is defined under subsection 248(1) of the Income Tax Act as a position entitling the individual to a fixed or ascertained remuneration. Subsection 248(1) of the Income Tax Act defines "employment" as a position where an individual is in the service of another person.
Conditions Precedent to Claim Work Space in Home Expenses
Under subsection 8(13) of the Income Tax Act, an individual's "self-contained domestic establishment" in which the individual resides may be referred to as his or her work space in home. For a space to be a "self-contained domestic establishment" within the meaning of subsection 248(1) of the Income Tax Act, it must be (1) a dwelling-home (2) an apartment, or (3) a similar place of residence in which the individual eats and sleeps.
To deduct work space in home expenses, an employee's work space must be either (i) the place where the individual principally performs the duties of his or her office or employment, or (ii) used exclusively for the purpose of earning income from office or employment and is used on an ongoing basis to meet customers and other persons in the ordinary course of performing duties of office or employment. The Canada Revenue Agency's ("CRA") (Guide T4044) explains that "principally" means that the work space is used "more than 50% of the time" to do work. While CRA's publications can provide guidance with respect to interpreting Canada's Income Tax Act and its provisions, these documents are not legally binding and they do not consider the tax treatments of each taxpayer's specific situation. In addition, while the CRA is responsible for enforcing and administering the Income Tax Act, it's not responsible for interpreting Act. As such, to interpret the law as written in the Income Tax Act one must look to the binding authority in the case law or consult with a Canadian tax lawyer.
In Lester v the Queen, the Tax Court of Canada held that work space in home gas expenses were deductible pursuant to subsection 8(13) where the taxpayer principally performed the duties of his employment in his residential property in Hamilton, Ontario. In Landry v. The Queen, the Tax Court of Canada held that telephone meetings are sufficient to meet the requirements of subparagraph 8(13)(a)(ii) in relation to the requirement that the space is regularly used for meetings and to carry out regular work duties. In contrast, subsection 8(13) did not apply in Taupier Girard v The Queen where the Tax Court of Canada held that it was clear from the evidence that the Appellant had not been using the space exclusively to earn income and to meet clients on a regular basis in the ordinary course of her employment.
Paragraph 8(13)(b) of the Income Tax Act provides that where the work space conditions set out above are met, the amount of work space in home expenses that is deductible in computing a taxpayer's income shall not exceed the taxpayer's income for that year from office or employment. In this context, the deduction is limited by the annual amount of employment income the individual receives and it cannot exceed the employee's annual income from his or her office or employment.
Pursuant to paragraph 8(13)(c), amounts in respect of work space expenses not deductible under paragraph 8(13)(b) for the immediately preceding taxation year from office or employment shall be deemed to be an amount from office or employment that is otherwise deductible in computing that taxpayer's income. This means that where an employee is unable to deduct all of his or her work space in home expenses in one year, such amounts can be carried forward and deducted in the following year provided that the individual is reporting income from the same office or employment in that subsequent year. In this context, while employees can only deduct work space in home expenses from income to which the expenses relate, this rule provides an indefinite carry forward to allowable work space in home expenses provided that the individual is reporting income from the same office or employment in the year that the claim is made.
What Can be Deducted?
The CRA (Guide T4044) provides that individuals can deduct part of the costs pertaining to work space in home expenses including electricity, heating, and maintenance. However, mortgage interest is not deductible as it does not constitute a work space in home expense. In Lester v the Queen, the Tax Court of Canada held that gas expenses were deductible pursuant to subsection 8(13) of the Income Tax Act.
How Does One Deduct Work Space in Home Expenses?
To deduct work space in home expenses, employees must have their employer complete the CRA T2200 form titled "Declaration of Conditions of Employment". The expenses are entered as a deduction from the employee's income when preparing their personal tax returns, however, employees are not required to submit the T2200 form along with their income tax returns. It is highly recommended that employee keep the T2200 form along with receipts confirming the amount spent on work space in home expenses in case the CRA requests to see them.
The Impact of COVID-19 on the Tax Treatment of Work Space In Home
It is clear that COVID-19 changed the way we view and define working at home. For instance, telephone meetings and virtual meetings are becoming the new norm. In addition, many corporations, such as Shopify, have restructured their office model and moved towards a permanently working from home model. As a result, there are many questions pertaining to the deductibility of work space in home expenses including: can I deduct my expenses? What kinds of expenses are eligible for a tax deduction? Will the CRA require confirmation of my claims?
Although the CRA recently announced that it will accept reimbursements for an amount not exceeding $500 for the purchase of computer related equipment under COVID-19, there have been no announcements by the government pertaining to all other work space in home related expenses and whether (or not) the definitions of work space in home related expenses under Canada's Income Tax Act are expanding.
Tax Tips – Income Tax & Work Space In Home
If you are working from home due to COVID-19 and you are considering claiming work space in home expenses, it is highly recommended that you keep track of all your office and employment related expenses and hold on to all your receipts. After all, there is still enough time in 2020 for the government to expand the work space in home rules and definitions for all Canadians. If you have questions regarding work space in home expenses and deductions or for inquiries pertaining to the application and conditions under subsection 8(13) of the Income Tax Act, please contact our tax law office to speak with one of our experienced Certified Specialist in Taxation Canadian tax lawyers.