Co-Author by Marc Pelletier

The World Health Organization declared the COVID-19 outbreak a pandemic on March 11, 2020, and many employers responded by requiring or encouraging their employees to work from home.  Even as Canada commences "reopening", it is anticipated that many employers will have a large number of employees transition to permanent work from home arrangements. As part of a broader strategy on working from home, we recommend that employers consider the issue of home office expense reimbursement and the ability of employees to deduct unreimbursed expenses, both from an employment law perspective and also under the Income Tax Act (Canada) (ITA).

Reimbursements and Allowances for Home Office Expenses

The Importance of Communication

Employers will need to consider what, if any, home office expenses the employer will reimburse, and what impact mandatory or recommended work from home arrangements may have on the employer's obligation to reimburse.  As a starting point, an employee does not have a general right to reimbursement for expenses. As a result, employers should review existing employment contracts and policies (including informal past practices) to determine whether these may create a right for employees to claim reimbursement for expenses incurred while working from home. The employer should ensure the contract or policy clearly communicates to employees what the employer's reimbursement policy is so that everyone understands the expectations. Clarity in communication is particularly important if the employer does not otherwise provide the employee with the tools necessary for the employee to work remotely as the employee may assume costs will be reimbursed. The communications should make it clear whether the reimbursement arrangements are temporary (e.g., during the COVID-19 emergency order, to August 31, 2020, etc.) or are permanent.

Tax Treatment

From a tax perspective, it is important to note the distinction between employer-provided "allowances" and "reimbursements" of expenses. Allowances, which are provided without the need for the employee to provide receipts, are generally taxable to an employee as employment income, unless a specific exception applies. In contrasts, reimbursements which are supported by appropriate receipts are generally not taxable, provided that the primary benefit of the expense is to the employer (e.g., the reimbursement is not for a personal or living expense).

The historic position of the Canada Revenue Agency (CRA) has been that reimbursements and allowances for home office equipment are at least partially for the benefit of an employee and therefore taxable. In the context of the COVID-19 pandemic, however, the CRA has announced an administrative concession that a reimbursement by an employer of an amount not exceeding $500, on presentation of a receipt, for the purchase of personal computer equipment will not be taxable to the employee, on the basis that it is principally for the benefit of the employer.

Unreimbursed Expenses

Where an employee incurs home office expenses that are not reimbursed by the employer, the question will arise as to whether the employee can deduct those expenses and, if so, whether the employer should take the appropriate steps to support that deduction.

The ITA contains limited rules that allow employees to deduct expenses, but these rules were introduced before technology enabled people to meet "face to face" over the internet and seamlessly access work files and systems from home. The CRA has historically interpreted these rules narrowly, and, as such, the application of these rules is unclear in the current environment.  The CRA has been asked to comment on the eligibility requirements for employee home office expense deductions during the COVID-19 pandemic and we understand the Agency is currently considering these issues.  Until clarification is forthcoming, employees may wish to track expenses and maintain receipts to support a future claim for deductibility.

Employee Paid Home Office Expenses—What Expenses Are Deductible?

While employees cannot deduct capital expenses, such as the cost of a new desk, office chair or computer monitor, the ITA does generally allow employees to deduct office rent, salary to an assistant or substitute, and the cost of supplies consumed directly in the performance of the duties of an office or employment (such as stationery, stamps, toner, ink cartridges, etc.), if:

  1. the employee is not reimbursed for the expense; and 
  2. the employee was "required by the contract of employment" to pay for such office rent or salary, or to provide and pay for such supplies.

Additional requirements apply for expenses that relate to a work space in a home in which the taxpayer resides. To deduct work space expenses, the work space must either be:

  1. the place where the employee "principally" performs the office or employment duties; or 
  2. used exclusively during the relevant period to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.

Examples of work space expenses include rent, fuel, electricity, light bulbs, cleaning materials, minor repairs and other expenses paid by the employee for the maintenance of their home, but do not include mortgage interest, capital cost allowance, property taxes or insurance costs—unless the employee is a commissioned sales employee, in which case a reasonable proportion of property taxes and insurance costs may be deductible.

If all of the requirements for claiming home office expenses are satisfied, an employee can deduct the proportion of the expenses related to their employment. For some expenses, the entire amount will relate to employment and be deductible. For other expenses, such as rent, the expense must be apportioned based on factors such as the size of the work space relative to the employee's apartment or house, and whether the work space is used exclusively for work purposes of partially for work and partially for personal purposes.

Required by the Contract of Employment

For an amount to be deductible as a home office expense, the employee must be "required by the contract of employment" to provide and/or pay for the expense. The CRA considers that ordinarily this should be an express requirement in the employment contract, but accepts that in some cases this requirement can be met where there is an implied or tacit understanding between the employee and employer that a payment was to be made by the employee and was, in fact, necessary under the circumstances to fulfill the duties of the employment.

For example, the CRA has stated that, where an employee works from home and does not have access to an employer's office, it appears the employee is required to work from home. Applying this position to the current pandemic, if an employer's office is closed and employees are working from home as a result, the CRA should consider that the employee is required to work from home and incur certain expenses for the purposes of the home office deduction. The situation is, however, less clear for an employee working from home that has access to an employer's office. This is clearly a gray area. Some assistance to this issue is found in a CRA position which considered a telework arrangement and indicated that the employee in the situation was "required" to provide a work space at home and pay certain expenses even if the formal telework arrangement was entered into voluntarily, provided that the arrangement was clearly understood by the employee and employer. 

During the COVID-19 pandemic, if an employer has instructed an employee to work from home, the employee should be considered required to work from home and pay certain expenses for the purposes of the home office deduction. If instead the employer recommends, encourages or allows an employee to work from home, but also allows the employee to work at the employer's office if the employee prefers, it is questionable whether the employee is "required by the contract of employment" to work from home and incur home office expenses. Under the CRA's current administrative guidance, a telework arrangement must be formal in order for the employee to be considered required to work from home and incur home office expenses. Further CRA guidance would be helpful for situations where, due to the current situation, an employer allows but does not strictly require an employee to work from home, and the employee chooses, whether because of health concerns or otherwise to work from home and incur expenses.

Where an Employee "Principally" Performs Office or Employment Duties

Work space expenses may be deductible if an employee's home office is the place where the employee "principally" performs their office or employment duties. The CRA interprets "principally" to mean more than 50 percent. An important question during COVID-19 is "50 percent of what?" It is unclear whether the ITA requires measuring working-at-home time against the entire time the employee was employed by the employer in the year, or if a shorter subset of the year can be considered, such as during a temporary work-at-home order during COVID-19.

For some employees, depending on how long COVID-19 work-at-home recommendations remain in effect, they may end up performing more than six months' worth of office or employment duties at home, and therefore clearly satisfying the "principally performs" test. For other employees, their work-at-home time may be only three months in 2020. Arguably, the principally performs test should be applied based on the three month subset of the year where 100 percent of the employee's office or employment duties were performed at home, rather than looking at the full year and concluding that only 25 percent of the employee's office or employment duties were performed at home. While there is some supporting CRA commentary, this issue is likely to remain uncertain until additional CRA guidance is released.

Meeting Customers—Are Face-to-Face Meetings Required?

If an employee does not principally perform their office or employment duties from home, the employee may still be able to deduct work space expenses if the work space is used exclusively during the relevant period to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.

It is the CRA's longstanding position that the phrase "meeting customers or other persons" includes only face-to-face encounters, and does not include meetings by such means as email, telephone, and Skype. This is contrary to various Tax Court of Canada informal procedure decisions (which are non-binding for other taxpayers), where the Tax Court considered that the term "meeting" could be satisfied by phone calls as the term does not require a person's physical presence.

As illustrated by work practices during the COVID-19 pandemic, electronic and phone "meetings" are becoming an increasingly common method of communicating with clients, customers and patients. The CRA's interpretation of the ITA in this regard has become out dated, is inconsistent with case law, and, we would argue, incorrect in law.

Practical Considerations When Issuing Form T2200s to Employees

For an employee's home office expenses to be deductible, the employer must certify that the employee met the conditions of employment discussed above and was required to pay for the expenses under their employment contract. The employer does not have to certify whether the employee satisfies the additional requirements noted above for work space expenses. This certification is made using Form T2200, Declaration of Conditions of Employment. The employer's intentions in this regard should be clearly communicated.

Issuing a signed Form T2200 to an employee does not necessarily mean that the employee can deduct home office expenses. The employee and the expenses claimed must still satisfy the deductibility tests contained in the ITA.

Employers should consider the risks and administrative and other costs associated with issuing Form T2200s before certifying an employee's conditions of employment. Although not typical, the CRA has indicated that if an employer completes a Form T2200 in a way that is intentionally incorrect, shows an indifference to whether the ITA is complied with, or shows a reckless disregard of the law, it may consider assessing a third-party penalty against the employer. This penalty is generally equal to the greater of: (i) $1,000 (per Form T2200), and (ii) the lesser of the employee's penalty for making a false statement and $100,000. This penalty is intended to apply only to serious conduct, not simple mistakes, so in most cases should not apply where an employer acts reasonably and relies on information provided by employees in good faith. More significantly, if the CRA has reason to question the validity of a Form T2200, the employer may have an increased risk of a payroll audit and to a significantly higher level of scrutiny in other tax related areas.

While the CRA expects employers to complete Form T2200s for employees that have reasonable grounds to make home office deduction claims, there is no legal requirement under the ITA that employers issue a Form T2200 to all requesting employees. For some employers, the burden of issuing Form T2200s to a large number employees, combined with the potential risk of penalties and CRA scrutiny, may outweigh the benefits of employees claiming (in many cases) relatively small home office deductions.

To reduce the burden on employers during the COVID-19 pandemic, the CRA has been requested to allow employers to use a stream-lined approach to avoid issuing potentially large numbers of Form T2200s. The CRA has indicated that it is currently reviewing these issues.


The appropriate treatment of home office expenses is uncertain during temporary COVID-19 work-at-home orders. Technical issues aside, it is critical that employers clearly communicate with their employees what, if any, reimbursement arrangements are in place and whether, and in what circumstances, the employer is willing to issue T2200s.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.