Home Office Expense

Definition

Home office expense is the allocated portion of occupancy costs (utilities, internet, property tax, mortgage interest, rent, repairs, insurance) attributable to a work space in the home used for business or employment. The mechanics differ sharply between a corporation using the owner's home, an employee of any company, and an unincorporated self-employed person.

Key rules

• Unincorporated (s.18(12)): the work space must be either the principal place of business, or used exclusively for the business and used on a regular and continuous basis for meeting clients. Deductions cannot create or increase a business loss; the excess carries forward.
• Employees (s.8(13)): a T2200 signed by the employer is required, the space must meet the same principal-place or regular-meeting test, and deductions cannot exceed employment income. Only a defined list of costs is allowed (utilities, supplies, a portion of rent; owners cannot deduct mortgage interest, property tax, or home insurance for employment).
• Corporation using owner's home: the corporation cannot directly deduct the owner's home costs (the owner is a separate taxpayer). Two common approaches: (a) the corporation pays arm's-length rent to the owner, who reports it as rental income and deducts a proportional share of the home's costs, or (b) the corporation reimburses specific business-use costs on an accountable plan (utilities, internet, supplies), which is deductible to the corporation and not a taxable benefit under s.6(1)(a) to the extent it relates to the employer's business.
• Allocation: business-use percentage is normally square footage of the work space divided by total finished square footage, with a further time-use factor if the space is shared.
• Simplified flat-rate method: the pandemic-era flat $2/day method expired for 2023 and later years. The detailed method is now the only option for employees.

Example

Alder Design Inc. operates from the owner's 1,500 sq ft home in Vancouver. A 150 sq ft room is used exclusively as the office (10% of the home).

Option A, rent to owner: the corporation pays the owner $400/month of fair market rent. The corporation deducts $4,800 in rent (see ). The owner reports $4,800 of rental income on T1 and deducts 10% of home costs (utilities, insurance, property tax, mortgage interest, maintenance) plus CCA if desired. CCA on the owner's principal residence is rarely claimed because it jeopardizes the principal residence exemption on sale.

Option B, reimbursement: the corporation reimburses the owner for $1,200/year of incremental internet, cell, and hydro costs on submitted receipts. The full $1,200 is deductible to the corporation with no taxable benefit to the owner.

Common mistakes

• Having the corporation deduct the owner's mortgage interest and property tax directly. The corporation is not the homeowner; only the rent or reimbursement route works.
• Paying rent that is not fair market value. Excess rent is unreasonable under s.67.
• Forgetting the s.18(12) loss restriction on unincorporated claims. Home office cannot create a loss; it carries forward.
• Treating a space that is also a TV room as exclusively used. The CRA applies the time-use factor in that case.
• Claiming CCA on the owner's principal residence, which converts part of the property to business use and erodes the principal residence exemption.

Related concepts