Home Office Expense

Definition

Home-office treatment depends on who earns the income and who pays the cost. A sole proprietor, an employee and a shareholder's corporation cannot simply use the same deduction. The temporary flat-rate employee method applied only to 2020 through 2022.

Sole proprietors

Business-use-of-home expenses require either that the work space is the principal place of business, or that it is used exclusively to earn business income and regularly and continuously to meet clients, customers or patients. Allocate eligible costs reasonably by area and, where relevant, time. Eligible costs may include utilities, insurance, property taxes, rent and mortgage interest, but not mortgage principal. The deduction cannot create or increase a business loss; qualifying unused amounts can carry forward subject to the same business and eligibility rules. CRA business-use-of-home folio

Employees, including shareholder-employees

An eligible employee using the detailed method needs the required employment arrangement, unreimbursed eligible expenses and a completed T2200. One work-space test is working from home more than 50% of the time for at least four consecutive weeks. The alternative concerns exclusive use to earn employment income and regular, continuous work-related meetings.

Salaried employees cannot deduct mortgage interest, property taxes, home insurance or CCA as home-office employment expenses. Eligible commission employees may claim some additional categories, including property taxes and home insurance, subject to their conditions and limits. No employee may claim a cost already reimbursed. CRA employment-expense guide

Corporations

The corporation may pay documented business costs or reimburse qualifying employee expenses, but a flat payment of the owner's household bills is not automatically a tax-free reimbursement. Identify the actual expense, business share, recipient's capacity and any taxable benefit.

Alternatively, a genuine rental arrangement can create a corporate rent expense and personal rental income. Related-party rent must be reasonable. The rental activity, GST/HST implications, principal-residence treatment and benefit rules require their own analysis. A lease does not turn personal costs into corporate costs.

Allocation example

A sole proprietor meets the eligibility test and exclusively uses 150 square feet of a 1,500-square-foot home for the business all year. The area ratio is 10%. If eligible costs after recoverable taxes total $24,000, the preliminary allocation is $2,400, subject to the business-income limit. Shared personal space also requires a reasonable time adjustment. That calculation does not establish the deduction for an employee or corporation.

Capital and records

Keep floor-area calculations, use records, bills and any reimbursement or rental agreement. Claiming CCA or making structural changes can affect principal-residence treatment; do not assume every small business use destroys the exemption or that a tax-free home sale is guaranteed. CRA changing part of a principal residence to business use

Related concepts

• Business Expense Principle (ITA 18)
• Rent Expense
• Shareholder Benefits (ITA 15(1))