JUST FOR KNOWLEDGE SAKE 

HOME OFFICE EXPENSES

In these days a significant number of employees work at least part-time from their homes, the employer's costs of maintaining office space, usually in expensive urban markets, can go down.

As working from a home office has become more common, a certain degree of mythology has also grown up around the tax treatment of expenses related to maintaining a home office. In the most optimistic (and unrealistic) of such scenarios, virtually all household expenses, including the mortgage, are transformed into tax deductions, reducing one's tax liability to miniscule amounts. It goes almost without saying that such is not the case. Deductions are certainly available, but the tax rules governing what's deductible and when are specific and detailed.

It's important, when dealing with the question of the deductibility of home office expenses, to distinguish between deductions claimed by employees and those claimed by the self-employed. As is almost always the case in such matters, the self-employed enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally performs the duties of employment or must be the taxpayer's principal place of business: or

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim expenses such as property taxes, rent or mortgage interest (but not mortgage principal amounts), insurance, utilities costs, etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 10% of available floor space and who incurs $1000 each year in qualifying expenses would be entitled to deduct $100 ($1,000 times 10%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It's not, in other words, possible to run a business which produces $2,000 in income for the year and to then claim $5,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

One of the benefits which is commonly supposed to exist for home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one's home for tax purposes. For employees, however, such a claim is simply not allowed. While the self-employed may be entitled to claim CCA on a home, making such a claim can create short-term benefits with longer term costs. Making a CCA claim on one's home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable than any CCA claim which might have been made.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

• the employer must provide the employee with a form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;

• the employee must not have been reimbursed by the employer for such expenses; and

• the expenses incurred are incurred solely for the purpose of earning income from an office or employment.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities, cleaning costs and minor repairs (but not improvements). An employee is not entitled to claim any portion of property taxes, insurance or mortgage interest paid.

Slightly more latitude is provided to commission employees who work from home and own their home. Such employees may claim, in addition to the costs outlined above for employees, a portion of property taxes and insurance paid on the home. Mortgage interest and capital cost allowance remain non-deductible.

As is the case with self-employed taxpayers, an employee's deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed. While the deduction of home office expenses isn't the huge tax benefit that popular tax mythology would sometimes suggest it is, it can, assuming that the legal requirements are met and proper records kept, provide some tax relief on expenditures which would likely have to be incurred in any case by the taxpayer.

WHY SHOULD I FILE MY TAX RETURN IF I DON'T HAVE INCOME OR TAXABLE INCOME

This is very common question, why should I file my tax return when I don't have income or taxable income or tax owing? You will usually have to pay tax if your taxable income exceeds the amount of the basic personal exemption. There are other circumstances which also may require a tax return to be filed, such as you were requested by the Canada Revenue Agency (CRA) to file a return, or you have withdrawn amounts from your RRSP under the Home Buyers' Plan or the Lifelong Learning Plan, and have not yet repaid the entire amount or you claimed a capital gains reserve on your previous year's tax return. While preparing your return, remember that you must include your worldwide earnings in your taxable income.

Even if you are not required to file a tax return, it will often be to your advantage to do so, for some of the following reasons:

• You have had tax withheld from your income, and want to receive a refund

• To get benefit of federal government and provincial refundable tax credits, which are payable to you even if you have no earnings and have paid no tax. Such as Climate Action Incentive, Ontario Property and Sales Tax credit, GST/HST Credit. 

• You want to apply for the GST/HST credit - If you are 18 years of age or older, you should file a tax return even if you have no income, in order to apply for the GST credit. You must be 19 to receive the credit, but if you will turn 19 before April 1 of the following year, you should apply now so that you will receive your first GST payment as soon as possible after you turn 19. 

• For seniors who are receiving the GIS (Guaranteed Income Supplement), filing of their annual income tax return automatically renews the GIS (Guaranteed Income Supplement) eligibility.

• If you have a non-capital loss, which you can carry back to prior years or carry forward to future tax years. 

• You want to apply for the CCB(Canada Child Tax Benefit),  - In order to receive or continue to receive CCB (Eligible kid should not be over 6 years of age) payments for your children, you and your spouse must both file tax returns. 

• If you have unused tuition, education and textbook amounts that you would like to carry forward to use in the future.

ATTRIBUTION RULES ON TRANSFERS TO MINOR CHILDERN

The attribution rules applicable to transfers of property to minor children are somewhat less comprehensive, in that income received on property transferred or loaned to a minor (under age 18) child from a non-arm's length person (which would include parents, grandparents, great-grandparents, aunts, uncles and siblings) is attributed back to the transferor, but capital gains arising on such transferred or loaned property are not.
There's virtually no limit to the creativity of taxpayers (and their tax advisers), and consequently the attribution rules contain a number of more specific anti-avoidance provisions to supplement the general rules outlined above. There are still some legitimate income-splitting strategies available, but use of those strategies generally requires consultation with a tax adviser familiar with your personal financial and tax circumstances.

MISCELLANEOUS COMMON QUESTIONS

Self-Employed Individuals: These business people are entitled to claim a wide range of expenses. Basically anything that is incurred to earn income is deductible. If you use a portion of your home to do your work, you may be able to claim home office expenses. Expenses that can be claimed include, utilities, property taxes, mortgage interest, repairs and maintenance, rent, insurance, telephone etc. The portion claimed for your home office is the percentage of space of your office to the total square footage of your home.

Automobile Amounts:
The following changes to limits and rates will take effect as of January 1, 2023:

• The ceiling for capital cost allowances (CCA) for Class 10.1 passenger vehicles will be increased from $34,000 to $36,000, before tax, in respect of vehicles (new and used) acquired on or after January 1, 2023.

• The ceiling for CCA for Class 54 zero-emission passenger vehicles will be increased from $59,000 to $61,000, before tax, in respect of vehicles (new and used) acquired on or after January 1, 2023.  

• Deductible leasing costs will be increased from $900 to $950 per month, before tax, for new leases entered into on or after January 1, 2023.

• The limit on the deduction of tax-exempt allowances paid by employers to employees who use their personal vehicle for business purposes in the provinces will increase by seven cents to 68 cents per kilometre for the first 5,000 kilometres driven, and to 62 cents for each additional kilometre. For the territories, the limit will also increase by seven cents to 72 cents per kilometre for the first 5,000 kilometres driven, and to 66 cents for each additional kilometre.

 An employee driving a company car will get charged a taxable benefit called a "standby charge and operating benefit" based on the amount of kilometers the car is driven for personal use.

For individuals, automobile expenses can be deducted based the percentage of kilometers driven for business over total kilometers driven in the year. Automobile expenses include gas, insurance, license, repairs and maintenance, capital cost allowance (depreciation) or lease payments, and interest on automobile loans.

Remember: travel between home and place of work is not deductible, and you should keep a log of your travels.

Commissioned Salespersons:
Commissioned sales persons are allowed to deduct employment expenses to the extent you have earned commission and given that you were required to incur your own expenses in order to earn income. Expenses that can be deducted by a commissioned employee include:

Meals and entertainment - limited to 50% deduction. You must be away from your municipality for at least 12 hours in order to claim meals while traveling.
Automobile expenses (see above).
A portion of your home expenses (i.e., home office expenses) may be claimed as long as this is the place where you principally perform your employment duties or is exclusively used on a regular and continuous basis for meeting clients/customers in connection to performing your employment duties. As an employee, you cannot claim mortgage interest as part of your home office expenses. Maintenance, utilities, insurance and property taxes maybe claimed. Make sure your employer issues you form T2200, which states that you were required to incur your own expenses on the job.

Plan your borrowing:
Interest paid on a business or investment asset loan is tax deductible, use borrowed money to purchase business and investment assets, and use your personal cash to purchase personal use assets, such as a house or vehicle. In order to deduct the interest cost, the direct use of the borrowed funds must be to purchase business or investment assets. If you are self-employed, borrow to invest in your business, not to purchase investment assets such as stocks or bonds.

Dependants aren't always your children:
Even if a person does not meet all the conditions of a true dependant, you might be able to claim certain credits if that person meets other requirements. Consider the following:

Tuition or education amount transfer. Frequently students do not need to claim all of their tuition fees or education amounts to reduce tax payable to zero. They might be able to transfer some or all of the unused portion to you if you are their parent or grandparent (including in-law). The student does not have to live with you to do this.
Caregiver amount. You might be able to claim all or part of the Caregiver Amount if you had a grandparent or a mentally or physically infirm dependant who is over 18, lives with you and had a net income of less than limit specified in Income Tax Act for the relavant taxation year. Please visit Revenue Canada website for more information or give us call to discuss further.
Amount for an infirm adult. You can claim an amount for you or your spouse or common-law partner's dependent child or grandchild or other dependant relative if that relative was mentally or physically infirm, is 18 years or older and had a net income of less than limit specified in Income Tax Act for the relavant taxation year. You cannot claim this amount if you were required to make support payments for this dependant. Please visit Revenue Canada website for more information or give us call to discuss further.

Important Dates to Remember

Personal Returns

Personal returns are due on or before April 30th of every year. Balance owing is due on or before April 30th of every year. Late filing penalty of 5% + 1% per month will apply to all outstanding balances owing. Repeated failure to file, a penalty of 10% + 2% per month will apply. Interest on all outstanding balances owing will be computed at the prescribed rate from the day on which the amount was required to be paid to the day payment was received by CRA

Business Returns

Tax returns for sole proprietorships, partnerships and limited partnerships are due on or before June 15th of every year. Balance owing is due on or before April 30th of every year. Late filing penalty of 5% + 1% per month will apply to all outstanding balances owing. Repeated failure to file, a penalty of 10% + 2% per month will apply. Interest on all outstanding balances owing will be computed at the prescribed rate from the day on which the amount was required to be paid to the day payment was received by CRA.

Corporate Returns

Corporate tax returns are due 6 months after year end. Balance owing is due 3 months for CCPC and 2 months for other companies after its year end. Late filing penalty of 5% + 1% per month  per month will apply to all outstanding balances owing. Repeated failure to file, a penalty of 10% + 2% per month will apply. Interest on all outstanding balances owing will be computed at the prescribed rate from the day on which the amount was required to be paid to the day payment was received by CRA.

Payroll

T4 payroll summary must be filed by February 28th of every year. Monthly remittances are due at the 15th of every month. Late filing and late payments will attract penalty on outstanding balances owing. Interest on all outstanding balances owing will be computed at the prescribed rate from the day on which the amount was required to be paid to the day payment was received by CRA.

The information on this site is not intended to be a substitute for professional advice. Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage.