Business-Use-Of-Home Expenses

Many small businesses operate from a home-based office, and this is more common in the Covid environment. Too frequently, owners of a business wonder if they can claim Business-use-of-home expenses. The questions list typically includes what expenses are deductible and how to calculate the correct portion of the home office expense. 

Do you qualify for deducting Business-use-of-home expenses? 

As per the Canada Revenue Agency (CRA) guidelines, a business can deduct expenses for the business use of a workspace in the home if you meet one of the following conditions:

• It is your principal place of business; or 
• You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

What expenses are deductible: 

You can deduct part of your maintenance costs such as heating, home insurance, electricity, and cleaning materials in addition to property taxes, mortgage interest, and capital cost allowance (CCA) on the building. It is important to note that though you can claim CCA on the home, it is recommended not to claim the CCA. Once you sell the home, claiming CCA may trigger recapture rules and negatively impact the personal residence exemption on the capital gain.  

If you rent your home, you can deduct a part of the rent and any expenses you incur related to the workspace.

What portion of the total home expense is deductible?

As per CRA’s guideline, one should use a “reasonable basis” such as the areas of workspace used vis-a-vis the total area of the home. 

There are two common approaches/situations for calculating the portion of the expense that can be claimed.

a) Dedicated space in-home (used only for business purposes) 

Say you have three rooms in your home, and you decide to use one room exclusively for business purposes. In this case, the most appropriate method is the percentage of workspace used to allocate the expense to the business. 

Let’s assume total home annual maintenance expenses are $10,000, and the room used for the business has a total space of 100 square feet in a house that has a total space of 1000 square feet. In this case, since the business use is 10% space based on the percentage of space used, therefore, out of the total home expense of $10,000, $1000 will be allocated to the business. 

b) Space for both business and personal purpose  

If the space is used for both business and personal purposes, then in addition to the percentage of space, we need to calculate how many hours the space is used for business. Calculate how many hours in the day you use the rooms for your business, and then divide that amount by 24 hours. Similarly, if the space is used only for parts of the week, the claim must be adjusted accordingly. 

Say in the example above, you work 5 hours a day, five days a week. That means you work a total of 25 hours a week out of a total of 168 weekly hours. Then $1000 Business-use-of-home expenses claimed above will be reduced to $148.8 ($1000 X 25/168). 

What is the maximum amount that can be deducted?

The amount that can be deducted for business-use-of-home expenses is capped by the amount of business income. In other words, you cannot claim home office expenses in excess of business income or, put simply, you cannot use these expenses to increase or create a business loss.

However, if your home office expenses are more than the current year’s income, you can carry forward them to future years to claim them when you have enough business income. 

Also, a general note of caution, keep receipts of all your home-related expenses in case of the CRA audit.

If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting Professional Corporation (CPA). Source Accounting is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax, accounting, bookkeeping, payroll solutions, etc. We serve clients from Mississauga, Toronto, Brampton, Milton, Hamilton, Oakville, and across GTA. And if you find this post helpful, please let us know in your comments.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice; nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.