Can you deduct office expenses if you're working at home during COVID-19?
Home office (Pexels)
TORONTO -- With millions of Canadians now working from home, people have shelled out to buy desks, computer equipment and other supplies to set up home offices.
So if you’re spending money to work from home, what can you claim on your tax return when it is due June 1?
According to experts, it depends on multiple factors.
“Generally the CRA’s (Canada Revenue Agency) rule is that there are two conditions,” says Tannis Dawson, a tax specialist and vice-president of high net worth planning at TD Wealth. “You have to meet one or the other to be able to claim home office expenses.”
The first condition is that you mainly work from home, but the definition is key.
“The terminology they use is ‘principally,’ Dawson says. “In the past they’ve used the calendar year, which would mean that you have to be more than 50 per cent. So people will have to work at least six months in this condition at home in order to claim it. So it’s going to be hard with the current rules.”
The other criterion is that you use your home workspace to earn income regularly and continuously through client meetings. Again, definitions are key.
While some non-precedent-setting decisions in tax courts have recognized phone calls as meetings, the formal definition does not include virtual meetings. That means that so far, all those conferences calls with clients on Microsoft Teams, Zoom and Skype do not count as meetings in the eyes of the CRA.
“In the past, the CRA has said face-to-face meetings. So they haven’t modernized the rules,” Dawson says.
She points out that several groups have asked the CRA to re-examine the definitions to account for the current situation. One possible workaround could be allowing people to qualify on a monthly rather than a yearly basis.
But there’s no update so far on whether the CRA plans to modify the rules.
If you do happen to qualify by way of either of the criteria, then you need to get a Declaration of Conditions of Employment form (T2200) signed from your employer to keep on file in case of an audit.
If you do qualify, how do you define a home office for your claim?
If you do qualify for claiming a home office, then the deduction is based on the square footagethat you actually use for work.
“For example, if maybe 20 per cent of your house is used for your home office and filing cabinets and computer and the area where you meet your clients, and if used it for half the year, then it’s 10 per cent of the yearly expenses,” Dawson says.
She points out that the expenses you can claim for that percentage are further prorated if the space sometimes serves personal uses.
“If you have an area your kids are also using for schoolwork 25 per cent of the time, then I can only claim 75 per cent of the amount I had originally calculated,” Dawson says.
While it might seem impossible to make such a fine calculation, Dawson points out that home offices are an item on the CRA’s audit list.
“In the past I have seen audits of this,” she says. “It’s kind of funny because it’s not a big amount that people usually claim. The auditor can show up at your house and look at your area.”
What can you deduct for a home office?
The sorts of expenses you can claim for a home office depend on your work situation, Dawson says. The rules vary for those who are employees, employees who make commission, and those who are self-employed.
“It’s key because the deduction changes,” Dawson says.
For example, employees can only claim utilities, like heat and hydro, as well as maintenance and repairs to the area that they’re using as an office (Just the office, not the rest of the house. So your fancy upstairs bathroom reno doesn’t qualify as a home office deduction.)
That said, items like landscaping could count toward maintenance if you’re making the home office more presentable for clients, Dawson says.
Renters can also claim a portion of their rent for a home office, with the percentage still based on an allocation of the home that is used for the office.
Office supplies can also be deducted, but not if they constitute capital costs.
“The key here: you can deduct supplies but supplies are something that are used up directly in your duty of employment,” Dawson says. “So that is long-distance calls, air time, stationery; Nothing capital. So if someone bought a chair, bought a monitor – that is not deductible.”
Can I deduct my internet fees?
One point that some workers will likely find disappointing: The same fibre or cable line that brings you Netflix does not suddenly count as a tax-deductible business expense if you’re working from home.
“You can’t deduct the basic service charge for a phone line and that’s where it gets gray,” Dawson says. “A lot of people don’t think you can claim your internet because you already had your internet before and so it’s kind of like a landline.”
One possible exception to the internet rule:
“I think if someone didn’t have internet and then they got it just for this and then got rid of it, they’d have a better case,” Dawson says.
Similarly, you can’t claim the cost of your cell phone just because you take a few business calls.
However Dawson says you may be able to claim your long-distance charges and extra air time or data if those extra charges are clearly incurred because of business.
Other costs that cannot be claimed under home office expenses by regular employees include mortgage payments, mortgage interest, property insurance, property taxes, and depreciation on home equipment.
Dawson acknowledges that the last point on home equipment might be a head scratcher for some.
“(It) seems unfair because if someone’s using their home printer or home computer, they are using it and running its life down but they can’t claim depreciation,” she says.
Still, that is the current rule according to the CRA.
Employees who earn commission can also deduct a portion of their property tax and insurance from a home office.
Employers have a role to play
While most employees might not qualify to claim special equipment purchased to work from home, Dawson says it’s a good idea to check what costs your employer might cover.
“Any special equipment they need to work, like a headsetor extra Internet or something, they (the CRA) is always suggesting that they try to get reimbursed through their work,” Dawson says.
Some companies have even provided employees with a budget for outfitting themselves to work from home because of the pandemic.
There has been some good tax news on this front from the government, Dawson says.
In late April, the CRA announced a $500 allowance on any computing equipment that an employer is paying for, as long as they provide a receipt, meaning the employee is off the hook for the tax on up to $500 of what would normally be a taxable benefit.
“If the computer costs $1,000 and the employer paid it all, the employee will get a $500 taxable benefit instead of a $1,000 taxable benefit, and the employer will get a tax deduction for $1,000,”Dawson says.
For employees in the highest tax bracket, the CRA allowance could mean a savings of around $250 that they would normally have to pay on a taxable benefit.
In general, though, Dawson says you always want to get reimbursed from your employer for technology purchases as opposed to getting an allowance. That’s because while allowances result in taxable benefits for employees, reimbursements don’t.
If your employer will reimburse you, the key thing is to hang on to receipts, Dawson says.
And if you are lucky enough to get reimbursed for any supplies through work, you can’t claim any of those items on your return.
So is it worth trying to claim a home office?
Some tax experts say the answer is usually no.
“It’s based on the percentage of space you use in your house, so it’s miniscule,” says one Markham-based tax specialist. “I mean if you’ve got a little office that’s 100 square feet out of a 2,000 square-foot home… it comes to very little.”
“On the other hand of you live in a 600-square-foot condo or a two-bedroom condo and you’re using one of the rooms, it could be a larger percentage.”
Still, he says “half the time it’s not even worth making the claim.”
Dawson agrees.“Even if utilities were $500 a month and you use 20 per cent of your house and it’s only for half a year, so it’s 10 per cent; it’s $50. So it’s not huge,” she says.
Still, she says that with some uncertainty around who may qualify under the circumstances, it’s worth keeping track of your expenses this year. And if you’re working in your own business from home, the deductions might add up more than they would for an employee working from home.
“For self-employed people they have a lot more ability to claim home office expenses. If they are self-employed and that’s their business, they can claim property taxes, they can claim property insurance, they can claim mortgage interest,” Dawson says.
What to do now
If the CRA is contemplating a change in work-from-home definitions or allowances for the 2020 tax year, they’re not saying so yet.
“All Canadians have a role to play to help minimize the spread of COVID-19 by following public health advice, and for many people, that includes working remotely from home if possible,” CRA spokesperson Etienne Biram told CP24.com in an email.
“The rules regarding work-space-in-the-home expenses have not changed.”
But there are many months ahead before 2020 taxes are filed and the government could still decide a change is warranted.
So what should people be doing now if they think they may possible qualify for deductions?
“Right now they should be tracking all their expenses and having it just in case because the CPA and a couple of others have approached the CRA already,” Dawson says. “(The CRA) could make a change just for 2020 and say because of COVID-19, we will allow people to use a calculation month-to-month.”
She says employees should track their work and expenses now so that they’re prepared if the rules change and they do qualify, or if they find themselves working at home for six months and end up qualifying under the current rules.
“Who knows how long this will take, right?” Dawson says.
She thinksthat some business may not be in a hurry to send employees back to the office, even when they’re allowed to do so. Others may stagger or rotate employees who return to the office, meaning that people might end up working from home even after physical workspaces reopen.
In the meantime, you can stay in good standing by filing 2019 taxes by this year’s deadline, which has been extended to June 1, 2020 for individuals. The deadline to pay any amounts owed has been extended to September 1, 2020.
Detailed information on home office expenses can be found on the CRA’s website.