With the increase in working at home arrangements due to current events, employers and their employees may have questions about the tax treatment of home office expenses for these employees.
Generally, an employer can compensate an employee for home office expenses by way of an allowance or a reimbursement. An employee can also be given an "accountable" advance which is treated as a reimbursement assuming that the employee can provide itemized receipts and the balance is returned to the employer.
If an employee receives an allowance or if he or she pays for the expenses out-of-pocket, then the expenses may be deductible subject to certain requirements discussed below. If an allowance or reimbursement is considered a taxable benefit and not deductible to the employee, the employer can mitigate the cost to the employee by compensating the employee for the additional tax but will have to do so on a "gross up" basis as paying an employee's tax is also itself a taxable benefit.
If an employer gives an employee a flat rate allowance for home office expenses, it will normally be considered a taxable benefit. The amount of the allowance will be added to the employee's income.
Pursuant to paragraph 6(1)(b) of the Income Tax Act (Canada) (the "Act")1 all amounts received by the taxpayer in the year as allowances for personal or living expenses, or as an allowance for any other purpose, must be included in the taxpayer's income, unless it falls within one of the exceptions listed in subparagraphs 6(1)(b)(i) to (ix). An allowance given to an employee in respect of home office expenses is not listed. Accordingly, such allowances should be included in the employee's income.2
Example: Ruby's base salary is $100,000 per year. She receives a work-at-home allowance of $100 per month. The allowance is added to her employment income, which becomes $101,200 per year.
Assuming that Ruby lives in Ontario, and without regard to an employee deduction (if available and discussed below), the after-tax value of the allowance (i.e. what Ruby actually puts in her pocket) is approximately $679. In other words, Ruby receives about $56.60 per month in respect of her home office expenses.
An employer providing an employee with an allowance for a home office should be entitled to deduct the full amount of the allowance as a business expense, provided that the amount is reasonable in the circumstances.
Allowances are particularly useful if an employer wants to provide a standard amount to a group of employees.
If an employee submits itemized home office receipts to an employer, the employer can reimburse the employee for the expenses that are reasonable and employment related. Where an expense has both personal and business components, the employer would be required to report (and the employee to include) as income to the employee those amounts which pertain to personal use. For such mixed payments, a reasonable allocation between personal and business should be used to determine the taxable portion.
The reportable portion of the reimbursement – i.e., the excess or personal component of the expense – would be considered a taxable benefit and the employee would be required to pay income tax on the amount.
Certain expenses cannot be reimbursed because itemized receipts are not available. For example, unless a cell phone is used exclusively for business purposes, data on a cell-phone may not be reimbursable because usage is not tracked separately.3
Where an employer reimburses an employee for the cost of tools (eg. a home printer) or for capital expenses (eg. building an office at home or buying furniture), the reimbursement paid to the employee is a taxable benefit to be included in the employee's income.4
An employer providing an employee with reimbursements for a home office expenses, even certain capital expense such as the acquisition of tools, will normally be entitled to deduct the full amount of the reimbursements as a business expense, provided the amount is reasonable in the circumstances.5
Reimbursements are particularly appropriate where employees incur expenses on an irregular basis.
Certain employees can deduct home office related expenses, such as office supplies, a portion of basic cell phone service, and the cost of a work space in the home. In order for an employee to deduct home office expenses, the expenses must be deductible under paragraph 8(1)(f) (for commissioned employees) or paragraph 8(1)(i) (for non-commissioned employees) and satisfy the requirements of paragraph 8(13)(a) as explained below.
An employee's deductions for home office supplies and phone service are limited to the cost of supplies consumed directly in the performance of employment duties.6 For example, the cost of a long-distance call that relates to earning employment income is deductible; however the cost of a second telephone line, even if used exclusively for work purposes, is generally not deductible, because it is a fixed cost and not a supply consumed directly in earning income.
Office supplies such as stationery items, stamps, toner, ink cartridges, street maps, and directories are deductible because they are supplies consumed directly. However, "tools" such as computers, briefcases, or calculators are not deductible.
Employees may also deduct a reasonable portion of the cost that relates to the use of a workspace in a home such as the cost of electricity, heating, and maintenance. If an employee rents their home, they will be able to deduct a portion of their rent.
A salaried (non-commissioned) employee who owns their home will not be able to deduct property taxes and insurance in respect of their home office. However, commissioned employees may be able to deduct a reasonable portion of property taxes and home insurance. Mortgage interest and capital cost allowance (depreciation) cannot be deducted by either type of employees.
In order for these expenses to be deductible, the following conditions must be met7:
- the employment contract must require that the employee pay for the relevant expense;8
- the employer must sign a prescribed form (T2200) certifying that the conditions required for deductibility have been met;9 and
- the expenses must not have been reimbursed by the employer.
Furthermore, with respect to deducting home office expenses, one of two additional conditions in paragraph 8(13)(a) must be met:10
(i) the home office must be the place where the individual principally performs the duties of the office or employment, or
(ii) the home office must be used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment.
The word "principally" in paragraph 8(13)(a) means "more than 50% of the time".11 For example, if Max has a flexible arrangement whereby he is allowed to work from home whenever he is not required to be in his firm's downtown office, his employment contract may not require that he work from home. In this case, the home office expense deductions won't be available to Max.
Similarly, if Max works from home two days a week, he will not meet the "principally performs" test. Accordingly, the deductions discussed above won't be available to Max. On the other hand, if Max is required to work from home 3 days a week, he should satisfy the "principally performs" test. Unfortunately, the requirement that the home office be where the individual "principally" performs the duties of employment means that home offices maintained for occasional or emergency use likely does not qualify for the deduction.
Where an allowance is provided by the employer in respect of home office expenses (and is included in income pursuant to paragraph 6(1)(b)), employees may still be entitled to deduct such expenses they have incurred in the performance of their employment duties if they meet the conditions discussed above.12 As long as the employer did not reimburse the employee, it does not matter whether the employee paid out of pocket or if the employer provided a flat-rate allowance.
A common mistake by employers and employees hoping to deduct employee expenses such as home office expenses is assuming deductibility without considering the stringent requirements in the Act including that certain expenses be a condition of employment. It is typically recommended that such conditions be explicit by making it a provision of the employment agreement. If applicable, we also typically recommend a corporate policy to prepare T2200 forms contemporaneously with other tax and payroll forms and returns.
Finally, given the stringent conditions for the deductibility of
home office expenses, if practicable, employers should first
consider reimbursements of home office expenses. If the employer
does not agree that the employee is required to maintain a home
office that complies with the deductibility requirements in the
Act, the employer should make it clear that it will not certify
that the relevant conditions for employment have been met.
1. All statutory references herein are to the Act.
2. See CRA Views, Interpretation—internal, 2011-0402581I7 — Allowance for workspace in the home, July 12, 2011.
3. See CRA Views, Interpretation—external, 2013-0489981E5 — Reimbursement of cell phone plan used for work, September 24, 2013. See also, CRA Views, Interpretation—internal, 2014-0553481I7 — Taxable benefit—cell phones, March 6, 2015; CRA Views, Interpretation—external, 2011-0399171E5 — Cellular phone allowance, June 8, 2011.
4. CRA Views, Tech Interp, 1999-0013955 — Construction and expenses — workspace, February 3, 2000.
6. Government Publications — CRA Guides, T4044 — Employment Expenses 2017—Includes Forms T777, TL2, T2200, and GST370—2017
7. See, Government Publications — Interpretation Bulletins, Interpretation Bulletin, IT-352R2 — Employee's Expenses, Including Work Space in Home Expenses, August 26, 1994.
8. See i.e. paragraphs 8(1)(f)(i) and 8(1)(i)(iii).
9. Subsection 8(10). The T2200 form does not have to be filed with the CRA but should be kept by the employee in case the CRA asks to see it.
10. See, CRA Views, Ministerial correspondence, 2009-0325851M4 — Form T2200—home office expenses, July 20, 2009. See also, Government Publications — Interpretation Bulletins, Interpretation Bulletin, IT-514 — Work Space in Home Expenses, February 3, 1989; CRA Views, Interpretation—external, 2007-0254531E5 — Home office expenses, April 10, 2008.
11. 2009-0337751I7 — Work space in home.
12. See, CRA Round-up, 2011-08-270 — CRA Round-up: Allowance for workspace in the home, September 6, 2011; 2010-0361001E5 — Employee allowances for travel and home office.
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.