What can you deduct for your home office?

What CRA allows isn’t straightforward

If you were self-employed this past year, now is a good time to start gathering your paperwork to file your 2013 tax return. And remember some of the expenses you incur for your home may be deductible from business income if you have an office or other work space there.

Your home office expenses may be deductible in two situations: First, if your home is your principal place of business — that is, you do not have an office elsewhere. Second, if you have an office outside your home, your home office must be used exclusively for your business, and must be used on a “regular and continuous basis” for meeting clients, customers or patients.

It’s not always clear how many meetings you need to have in your home office to meet the “regular and continuous” requirement, but it will depend on the nature of your business.

The Canada Revenue Agency provides an example of a doctor who has offices both outside and inside his home. He meets one or two patients a week at his home office. The CRA says this work space would not be considered used on a regular and continuous basis. However, a work space used to meet an average of five patients a day for five days a week clearly meets the requirements. This example shows there is a large grey area in what the CRA considers to be regular and continuous.

If your home office meets the requirements, the portion of your house expenses that can be claimed as business expenses will normally be based on the fraction of your home used. You can usually exclude common areas such as hallways, kitchen and washrooms when making the calculation.

For example, if your home office is a 200-squarefoot room (or 18.5 square metres) and the total area of living space in your house (bedrooms, living room, dining room and the office) is 2,000 square feet (186 square metres). As long as your home office qualifies, you can claim 10% of your eligible costs.

The expenses you can claim include rent, if you are a tenant, mortgage interest if you own your home (but not the principal portion of blended mortgage payments), property taxes and home insurance. You can also claim expenses for utilities such as electricity, heat, water and gas.

But there are also some less obvious expenses that can be claimed, such as garden service, driveway snowplowing and minor repairs. You will need to keep receipts on file; do not simply estimate your expenses.

You can claim capital cost allowance (CCA) on the appropriate fraction of your home, but this is often not

There are some less obvious expenses that can be claimed

advisable. If you do, the CRA will take the position that fraction of your home is not part of your principal residence and it will disallow your claim for the principal residence exemption from capital gains tax for that portion of the home when you sell. Any CCA you claimed can also be “recaptured” into income when you sell your home.

Keep in mind home office expenses can only be claimed against income from your business.

You cannot use home office expenses to produce an overall business loss that is applied against other income. However, losses disallowed because of this rule can be carried forward and used against income from the same business in another year.

Since many of the requirements for deducting home office expenses depend upon your circumstances, it’s important to carefully document your claims so that you can back them up if the CRA asks you to.