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Claiming Home Office Expenses

Claiming Home Office Expenses

By Gabrielle Loren, CGA, Partner Loren, Nancke & Company

September 1, 2010

 

If you are an employee and are required by your employer to maintain and use part of your home as your principle place of business, you may be eligible to deduct home office expenses from your income.  In order to qualify for this deduction you must have a separate room in your home that is only used for business, i.e. you cannot make a deduction if you use the dining room table!  The amount deductible will be based on the ratio created when you divide your office square footage by the square footage of your home. 

If this ratio is 10%, then you can deduct 10% of your rent, electrical and gas costs, water charges, repair and maintenance costs and depending on your type of employment income, you may also be eligible to deduct that portion of your home insurance and property tax costs. Unfortunately, no claim is allowed for mortgage interest if you are an employee and you will have to obtain a From T2200 from your employer annually to confirm to the Canada Revenue Agency that you are eligible to make the claim.

If you are self-employed and you own or rent a home, which is also your principle place of business, you may deduct from your business profit a portion of the expenses related to the space used such as:

  • Rent or Mortgage interest
  • Insurance                                                           
  • Utilities
  • Property taxes                                       
  • Maintenance

In order to calculate the deductible portion, the square footage of the home and the square footage of the space used for business are needed.  The actual calculation would be as follows:

 

(A)Square Footage of Home Used for Business

(B)Square Footage of Entire Usable House Space

x (C) Allowable Expenses = (D) Deduction Available

(A/B x C = D)

 

In some circumstances you may use your personal living space for business as well.  An example would be running a child care operation out of your home where the children use a designated play area plus the living room and kitchen.  In this case, you will also need to calculate what portion of the day the area is used for the business.  For Example: The living room and kitchen are used 40% of the time by the home-based child-care operator to provide child care services.  The living room and kitchen are 400 square feet and the house is 2000 square feet.  The total cost of hydro, insurance and rent is $15,000 per year.  The deduction available would be 400/2000 x 40% x $15,000 = $1,200.

It is important to note that if the business is operating at a loss prior to deducting office in home expenses, no amount is deductible. In other words, you cannot increase your loss by claiming office in home expenses.  However, the deduction should still be calculated and included on your tax return as the amount can be deducted against future profits.  For example, if office in home expenses total $1,200 for both 2008 and 2009 and the business has a loss of $100 in 2008 but a profit of $5,000 in 2009, the loss to be reported on the 2008 return is $100 and the income for 2009 is $2,600 ($5,000-$1,200-$1,200).

If you make major changes (such as structural changes) to the property, even if it is to accommodate the business, or if you claim depreciation, no claim for an office in home is allowed.  Once the changes are made or depreciation is claimed, the Canada Revenue Agency considers you to have had a change in use of that property and thus you would lose the principle residence exemption on your house.

The principle residence exemption currently allows you to sell your house at a profit and not pay any tax on that profit. This is a very beneficial tax-free benefit that you do not want to lose so be sure to contact your professional tax advisor before you undertake any business venture.

 

Gabrielle Loren is a partner with Loren, Nancke & Company who provides accounting and income tax services to individuals, small businesses and corporations.  They are located at the International Plaza at Marine Drive and Capilano Road in North Vancouver, BC and can be reached at 604-904-3807 or Gabrielle@LNCo.ca

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