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How to Claim Your Home Office





My income taxes are organized for tax year 2008 and submitted to my accountant.   While going through my business deductions however, I realized that I haven’t posted in detail about how to claim a home office.  Coincidentally, how to claim a home office was a reader question as well.

As I have an online business, I’m eligible to claim my office space within my home.  Basically, a percentage of the expenses listed below can be used to claim against the business income.

What percentage you ask?  Calculate the amount of square footage your office (may include bathroom as well) takes in relation to the livable square footage of your house.  So if your home office is 100 sq. ft, and your living space of your house is 1000 sq. ft, then you can claim 10% of your mortgage, property taxes etc (see list below).

If in the first few years, your business is operating at a loss, the expenses can be claimed against other income.  However, CRA will only allow this to continue for a 2-3 years at which point, they expect you to turn a profit.

Home Office Deductions

  • Mortgage interest
  • Property tax
  • Fire insurance
  • Mortgage life insurance
  • Power bill
  • Internet bill*
  • Business Phone/Cell*
  • Equipment/furniture used for the business **

* 100% of these expenses can be claimed if used solely for the business.

** Some may need to be claimed as capital cost allowance.

An Example

Lets take a look at a situation similar to my own.  The home office is about 10% of my total livable square footage, which means that I can claim 10% of the following (assume that the office is used solely for business):

  • Mortgage interest: $4500 x 10% = $450
  • Property tax: $3000 x 10% = $300
  • Fire insurance: $500 x 10% = $50
  • Mortgage life insurance: $0
  • Utility bill (heat/light): $3000 x 10% = $300

The following deductions are in relation to how much was actually used for the business:

  • Internet bill: $480 x 50% = $240
  • Business Phone/Cell = $0
  • Equipment/furniture used for the business = $300 x 100% = $300

Total Deduction: $1,640

Simply gather some paper work together and start adding together expenses.  Before you know it, you’ll have a fairly significant deduction for your business.  In my case, a $1,640 deduction means that I’ll save about $656 income tax.  If you’re a small business owner, here are some other tax deductions to consider.

Heads up to those those who procrastinate (like me)!  If you have tax owing, the deadline to file is April 30th, 2009.





42 Comments, Comment or Ping

  1. Thanks to my home business I’m able to write off the new computer I bought last year and my internet bill. It’s not much, but every bit helps. I need to make a bigger % of my home an office to write off more! (Joke, don’t do that.)

  2. Great post for those of us with home businesses.

    I haven’t claimed anything for a home office because I don’t have one – I do all my work on my laptop (which I did claim) and that generally happens on the living room couch or dining room table.

    My main tax break is hiring my wife to help out – since she doesn’t have any other income – that is a pretty effective tax-saving device.

  3. 3. STOB

    FP,

    I would still claim a home office. Just go with the basic 10% and you’ll be fine. I also income split with my wife, and the tax saving are substantial.

    I myself have an E-Commerce business and instead of calculating the office space, deductions, etc., I just pay the mortgage holder (my wife) $200 per month for the space. I classify the office space as a loan and than pay back the loan. I just issue a cheque for $2,400 at the beginning of each fiscal year. I’ve been doing this for a few years with no problems. It’s easier for me this way.

  4. 4. Eden

    I’ve always been afraid to deduct my home office because I’ve heard it’s a red flag for audits. I only use a portion of my home office purely for business, but your 10% idea isn’t a bad one…if I can decide whatever I save from the 10% is worth the increased risk of audit.

  5. 5. Chet Kwapisinski

    Good post; however, one should be aware that home office expenses cannot create a loss or increase a loss. The good news is that they can be carried forward. Cheers

  6. 6. Chet Kwapisinski

    Just another quick point — as a rule one should not be expensing “furniture” and equipment but “depreciating it” called CCA or capital cost allowance in CRA terms. If your costs are reviewed during a pre or post assessment, items of that nature will not be able to be expensed. There are various categories of assets and their schedules available at:

    http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/cca-dpa/clsss-eng.html

    You will note that furniture ususally follows into Class 8.

    I am not trying to nit pick here but thought I would share some of my experiences. I strongly believe that everyone should be maximizing their tax returns and taking every available deduction within the rules. Tax efficiency is the name of the game.

    Cheers

  7. Eden, as long as you have a legitimate home business and make legitimate claims, then you shouldn’t fear an audit.

    Chet, great points, I should have mentioned that furniture etc should be deprecated via CCA. Especially since i’ve written about CCA before. :)

  8. I’m sure this insightful post will help a lot of internet entrepreneurs :-)

    Don’t fear that claiming too much will throw up red flags. Just make sure that your numbers are legitimate, within the rules, and well documented. Its fear that inhibits many from attempting a dream. Just do your homework and proceed with confidence.

    InvestAssetWealth

  9. 9. Sampson

    Great tips FT, we started claiming last year when we set up our Co. for property management – don’t think we claimed a portion of the property tax or mortgage interest though – thanks for the tips.

  10. 10. PAC

    Does the CRA rule about a loss over that period of time apply for rental properties?

  11. 11. Instrumike

    Great topic. I also claim 10% for my home office for mortgage, internet, heat, phone, etc. . I’m trying to find more ways of reducing my taxes as I’ve been paying way too much the last few years from my regular job prior to starting my small business. My business is a distributorship of a new construction product ( a “green” retaining wall ) and I do most of my marketing work out of my home office. I’m not worried about getting audited as I know that everything I’ve claimed is legit. I like the idea of getting your wife to help out. Four Pillars said its his main tax break and is an effective tax-saving device. Can you expand on this?

  12. 12. Jewel of Toronto

    My husband just got a job where he will be working from home. Will the same tax breaks be available to him even though he is working for an employer (i.e. not a home business)?

  13. I like the idea of getting your wife to help out. Four Pillars said its his main tax break and is an effective tax-saving device. Can you expand on this?

    Instrumike – if I kept all the income from the business the it would be taxed at a 40%+ rate. By hiring my wife I essentially transfer some of my income from the business to her.

    This works quite well in our case because I’m in a high tax bracket and she is a stay-at-home mom who only earns a couple of grand/year from CCTB etc. The only drawback is that we lose the spousal credit as her income increases but it’s still worthwhile for us. Her income isn’t taxed up to around $10k.

    She does help out quite a bit so it’s not just a paper transaction.

  14. 14. Always Ask

    Does someone know – if you do claim deductions for home office, then in the event you sell your primary residence that % of you home no longer qualifies for preferential capital gains treatment (ie – you get fully taxed for capital gains on that 10% if that is what you used). I believe this to be true, and probably needs to be evaluated before you decide this is a great idea.

  15. 15. Chet Kwapisinski

    Jewel of Toronto —- not normally unless the employer signs a T2200, Conditions of Employment document, and certain criteria are met. This is fairly common in some professions in the Health Care and IT Industries. Read the T2200 carefully and ensure that the first 2 criteria are met. Most HR functions and Finance in corporations are familiar with the T2200.

    Cheers

  16. 16. Commander T

    I just wanted to clear up a few misconceptions people have regarding the home office expenses. First the home office expenses can not be used to create or increase a loss from a business.

    Second you only have to worry about losing your principle residence exemption on parts of your home if you claim CCA on a portion of your home.

    You are allowed to claim home office expenses as an employee. However the list of what expenses you can claim is smaller. For example no employee can deduct mortgage interest, the furniture or even a computer nor can an employee capitalize any of these costs. In addition there are certain expenses that can only be deducted against commission income and not regular salary.

  17. 17. Chet Kwapisinski

    Commander T — a further clarification as an employee you must have a T2200 signed in addition to the points that you have stated whether commissoned or not..

    Cheers

  18. 18. Stephan

    I have been claiming home office expenses for many years now and never been audited. Just keep your papers in order.

    FT: Are you 100% sure you can add the bathroom sq. ft. in your total area? It wouldn’t change much, but I never calculated it.

    For those who operate a business (this might be stretching the topic a bit), I was wondering how you pay yourself. There is money sitting in the business bank account and I always hesitate before transfering money to my personal account.

    Stephan

  19. Stephan, claiming the bathroom is something you’ll have to check with your accountant. A couple of accountants have mentioned to claim the bathroom as well.

    With regards to how to pay yourself, it depends on if the business is under a corporation or not. Here are a couple of articles that may help:
    http://www.milliondollarjourney.com/private-canadian-corporations-and-taxes-the-basics.htm
    http://www.milliondollarjourney.com/private-canadian-corporations-and-taxes-scenarios.htm

  20. 20. Always Ask

    Thanks Commander T – the claiming of CCA distinction was what I was looking for.

  21. the claiming of CCA distinction was what I was looking for.

    Yes, thanks – I wasn’t aware of this.

  22. 22. Instrumike

    Thanks for responding FP.

    I am in a similar situation – high tax bracket with a stay-at-home spouse. I’ll have to look into the spousal credit to see if it works for us.

    Cheers

  23. 23. Kris

    FT,
    After reading your post, I am a little perplexed.

    I use my home office to edit reports, which are emailed to me. I work part-time. It seems to me that I am supposed to further reduce my office expenses by the # of days worked per week (I average 3 of 7) and by the # of hours worked per day (I average 6 hours out of 24). If I do this, my home office expenses for the year are almost negligible.

    I feel like I am being unduly penalized by the CRA for working part time. If I worked 5 days per week for 8 hours a day I do not think I would have to make the reductions, and could use your calculations.

    Totally confusing to me and hoping to hear some news in my favour….

  24. 24. Chet Kwapisinski

    Just another clarification about home office expenses initially mentioned. Those expenses that are 100% business expenses should not be confused with home office expenses. The business expenses actually go an another part of the schedule, the new T2125 this year, and can be deducted from income to create a loss as opposed to home office expenses that are prorated because they are a shared resource (personal and business use).

    Cheers

  25. I had talked to my accountant about claiming the home office and he said it was ill-advised. Primarily, the office has to be utilized 100% for your business. There is no partial deduction for qualification. Therefore, if you utilize that computer to send a single personal email or perform work of a non-business nature (and the auditors can and will audit your computer, if they actually had the resources), you would be in violation. Additionally, don’t forget that when you sell your home, there’s some sort of additional fee that you have to pay back, perhaps due to your depreciation deduction? which negates part of the benefit. There were a few downsides, aside from the fact that it’s a favorite red flag for auditors. So, I just deduct partial laptop/cable/printer, etc., but not the office.

  26. 26. Chet Kwapisinski

    “Darwin’s Finance’ for further clarification we need to differentiate the types of people using home office expenses as a deduction. If we are talking about the self employed then your accountant is bordering on the facts; however, some of it is subject to interpretation and some judgment, please read IT514 and then tell me that sending a personal email violates the rules technically. In addition to suggest that it is a red flag may be true; however, we have a system that has pre assessment and post assessment reviews for areas that may be cloudy or questionable. These reviews may or may not precipitate further investigation ie) an audit. I do not believe there is a single judge in the Ferderal tax court that woulds accept sending a personal message as a viloation nor would an auditor even consider highlighting such a fact in isolation unless it is in a context of multiple violations. Sorry to be so long winded; however, we have a fair tax system and legitimate, documented deductions should be used to their fullest. As a matter of fact it is our responsiblity to maximize our deductions to the fullest extent within the law. Cheers

    Cheers

  27. Yes, in my case, referring to self-employed. Realistically, to claim that using a room in my basement is actually required for me to blog is pretty silly; I can’t imagine an IRS auditor that would believe that. Don’t get me wrong, I love to save on taxes too, but there are limits of reason. I know someone who claims their home office that has a bed in it. For real. They also eat out and claim it’s for business. It’s pretty common. It seems like the “thing to do” and harmless, but the people that are accurately reporting their income and tax deductions are funding the disingenuous claims of people that take advantage of the system right? Nothing’s really “free”, it’s the other taxpayers funding the behavior. So, it’s not always about “what you can get away with”, but also, what’s right.

  28. 28. Chet Kwapisinski

    “Darwin’s Finance” — my references here are to the Canadian Tax System ie) CRA Auditors and not IRS (US) as the Canadian and US laws are somewhat different. There will always be people exploiting and taking advantage of any system especially if it is based on honour, integrity and self assessment. I can only do what I believe is correct within my understanding of the law. As you see all types of abuse in our system and people will continue to exploit until they are challenged.

    Cheers

  29. Apparently I was told that anything past 30% claim of a home office is too much. Heck even 30% is too much.

    Thank God for April 30th, procrastination rules! =)

  30. 30. Chet Kwapisinski

    General guidelines may be fine along with opinions; facts and legitimate documentation along with an understanding of the rules and applied properly rule the day. They have always passed scrutiny.

    Cheers,
    Chet

  31. 31. cannon_fodder

    I claim about 5% (my office is a separate room on the main floor of our house) but I never included the bathroom.

    I work from home a lot as there is not an assigned space at our head office for me and my employer has been signing a T2200 for quite some time. I probably go into the office for meetings perhaps 2 times per month.

    It isn’t much, but it sure helps. The benefits from working from home far outweigh the tax writeoff!

  32. 32. New Dad

    Here’s a somewhat related question: I have a full time childcare provider that will come in to my house to look after our two kids starting next month. I will be doing the usual payroll deductions through CRA. Can a portion of expenses (utilities, insurance, etc.) be deducted from taxes?

    I’m thinking that the can’t be deducted but just wanted to confirm.

  33. 33. kiki

    I have 3 rental properties and I do repair and renovate the rental properties my self. I don’t have other job, I also use the home office to place ads, reseach online or reading stuffs relating to managing rental properties. When I take care my rental propeties, my cost of labour can not be claimed. Can I still claim my home office including computer( depreciation), property tax, utilites,intenet, phone around 10% for manging rental properties? In books, some says I can but some others says I must have active income to claim ( rental imcome is passive or have at least 6 employees) ? Any one knows more about this with CRA, please give it some lights

  34. kiki, probably best if you call CRA directly. However, with managing 3 rental properties, I can see how the home office could be considered a legitimate expense.

  35. 35. Chet Kwapisinski

    Kiki — the answer is “it depends” ; however based on the information you provided it seems that you have income from property and not income from a business. To be considered a business you would have to be generally providing additional services as part of the operations eg) maid services, cleaning services, supplying meals etc….

    Factors that are irrelevant in determining whether you have business income are things like the the number of properties, the amount of time spent managing or supervising the units or houses…

    Best talk to a professional as it does “depend” but based on what you have outline, my initial take is that you will not be able to claim home office expenses.

    Hope that helps.

    Cheers

  36. 36. Chet Kwapisinski

    Kiki and FT — just a final comment from me on Home Office Expenses. One way that may help you determine if they may apply in your circumstances is review the appropriate schedules where you report your income and see if there is a provision for calculating home office expenses ie) T777, T2125, T776. These schedules define what expenses may apply over all and then one needs to assess further which ones apply if you are salaried, commissioned or self employed etc…. Cheers

  37. 37. Kiki

    Thanks for all your help. I like this blog, very well written. I will call CRA but now I assume that I can not claim the home office expense.
    I am doing my tax right now, I am using form T776 and on there, I claimed my auto expense but I don’t find any place I can claim auto CCA although business form(T2125) allows to do that. Does the rental operation not allow to claim motor CCA? And since I can not claim home office, can I claim CCA on my cost of computer for the rental operation ( on the form T776)? Thks

  38. 38. Ray

    Thanks for the review on Home Office. I had forgotten 50% of my land line I wasn’t deducting – yeah, I spend a lot of time on the phone for work. My office comes in at 8.9% of the home and doesn’t include a bathroom (damn). Probably too late now to bump the percent to include the bathroom seeing as I’ve already claimed a certain amount the last 3 years running – home offices don’t grow, do they? :)

    I’m employed and have had the T2200 signed for the last 3 years. The extra deduction this year saved me $100, w00t.

  39. 39. Chet Kwapisinski

    Kiki — no CCA claim on Rental unless it is a business. You cannot claim bathroom ever, please read the Home Office Expenses. Look folks you can claim whatever you want as we have a self assessing system. However you need to understand the rules and apply them. If you are pre or post assessed or potentially audited you will be responsible for back taxes and interest the first time it is uncovered; however the 2nd time, 3rd time the penalties can be very punitive 25%, 505 of back taxes bothe federally and provincially.

    Also there is a real misunderstanding on telephone deductions, you cannot deduct any amount for home office expenses for normal landline usage ever. It is viewed by the CRA as an integral part of your home that you would have with or without a business.

    If you have a dedicated line- a fax line or landline or cell phone for business, then you can deduct all of those expenses as business expenses completely. That is why you have the telephones etc.. listed on the appropriate form in the section that applies to business activities whethe an employee or self employed. If a home office you must keep records to prove it was a business expense, ie) long distance telephone calls from a home that are business related and can be proved in reviewed are 100% deductible on the appropriate form. The cell phone is also another potential area that needs to be addressed, in other words, the same rules will apply that you would need to prove they are business related. If you use pay as you go, make sure that the card provider tracks the calls and can provide you a list of them. If you cannot, then you cannot prove they were realted to business. The onus of proof and understanding our tax rules is on you as a resident or citizen of Canada. The CRA produces many tax guides and Technical Interpretation Bulletins that address these issues and I encourage everyone to read them.

    Enough said on my part… Great forum and FT, I applaud you for your insights and topics.

    Cheers

  40. You said that the CRA will only allow you to claim businesses expenses at a loss to continue for a 2-3 years at which point, they expect you to turn a profit.

    So what if you continue not to profit after that 2-3 year threshold? You can’t simply claim these expenses anymore? Surely they can’t fault you for doing this, if it is legitimate, no?

  41. CM, technically, CRA could go back to previous years and revoke your prior tax claims if you don’t show profitability.

  42. 42. Shalon

    Both my wife and I have separate rooms which we “each” use as our respective home offices. Since the income generated is different, can we claim home office twice one for each.

    I listed the home office once for myself, added all the mortgage information and completed the rest.
    Then I added the home office this time for my spouse, added all the mortgage information and completed the rest.

    Am I doing this right, please let me know. Thanks.

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