Guidance on Deducting Home Office Expenses

One of the benefits of having a home based business (for freelancers, self employed contractors and small business owners) is that you can deduct the expenses relating to the space that you use to work.  This can result in a significant reduction in your tax bill for costs that you would incur regardless, giving you one more reason to love being your own boss.  

Criteria for Deductibility:

For home office expenses to be deductible, they have to meet the following criteria: 

  • It has to be your principal place of business i.e. you cannot deduct home office expenses if you have another office that relates to your business, elsewhere, even if you work 22 hours a day or you check your blackberry in bed.
  • The space designated as your home office is used to earn business income and/or you meet clients or customers on a regular basis.  You cannot deduct expenses relating to the workspace in your garage which is used for home improvement projects.

Tax Deductible Expenses:

If you meet these criteria then you can deduct the following expenses:

Mortgage interest: Although the Canada Revenue Agency is not as generous as the United states with respect to mortgage interest, a portion of it is deductible when you have a home office.  You will need to deduct the mortgage principal from the total repayments to calculate the actual amount of interest.  Most banks send statements that breaks down the principal and interest for the year, saving you from the pain of preparing amortization tables and trying to calculate it yourself.  If not, you should just contact your bank and they should be able to provide the information swiftly. 

Rent: If you are not a property owner, you are allowed to deduct your rent.

Property Taxes:  This includes city, water, school and any other unnecessary taxes levied on your property

Maintenance Costs: Heating, electricity, home insurance and cleaning materials are all deductible.

Repairs: Only repairs made to the actual home office space are deductible.  If you decide to redo your kitchen - not deductible.

Capital Cost Allowance (CCA): If you own your property you are allowed to deduct capital cost allowance or depreciation at a specified rate.  Most property in Canada falls under Class 1 and CCA is allowed at 4% per year.  This is a deduction that you should consider carefully before taking it will cause you to lose your principal residence exemption(one of our precious tax breaks) for the portion of the property that you are claiming the depreciation on.

Calculation of Deduction:

Once you have calculated the total of the amounts that apply, you have to then calculate how much of it is actually deductible .  This is done by prorating it for the space that you actually use as a home office.  For example if you use one room in your house exclusively as an office space and it represents one-fifth of your home, you are allowed to deducted 20% of the expenses incurred (per above).  Alternatively, if you do not have the luxury of designating one room exclusively as a home office, then a) you would make the same calculation i.e. calculate the square footage of the office are and divide it by the total square footage of your home.  b) you would then multiply that by the number of hours you use the space for office hours and divide it by 24.

If you only work part time you will need to further deduct the expenses by the number of days/hours that you do not work.

Other Considerations:

Home office expenses cannot exceed the net income for your business for the year. It can however be carried forward to apply to income from future years.

Other expenses that relate to your business like office supplies, computers, cell phone, internet etc. are deductible but are not considered to be home office expenses.  Instead the deductible portion is allocated based on the percentage that you use them for business.

It is important to ensure that your home office expenses deductions are reasonable.  It is always better, where it comes to tax deductions in general, to err on the side of conservatism as a tax audit is perhaps similar to a root canal in it's pleasantness.  And as always, if there are any doubts it is always best to consult an accountant.

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Ronika Khanna is a Montreal accountant who helps small businesses achieve their financial goals.  To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here.  You can also follow her on Facebook or Twitter.