With the recent increase in work-from-home arrangements due to COVID-19, many taxpayers may now be eligible to claim a deduction for their home office costs.

Employees

Employees working from home are eligible to claim certain work-from-home expenses if they obtain a signed Form T2200, Declaration of Conditions of Employment, and meet one of the following conditions:

• the employee principally (more than 50 per cent) performs the duties of their office or employment from the home office space; or
• the employee uses the home office exclusively for the purpose of earning income from their office or employment, and on a regular and continuous basis for meeting customers or other persons.

Once the requirements are met, employees may deduct expenses related to utilities, maintenance and rent based on the percentage of the work space related to the total finished area of the home. Employees on commission may also claim deductions for property taxes and home insurance from their commission income. Two notable exclusions from eligible expenses are mortgage interest and capital cost allowance (CCA). Also excluded are any expenses reimbursed by the employer.

Form T2200 also allows for the potential deduction of costs related to vehicle expenses, office rental, supplies, cell phones, assistant salaries and tools. Eligibility requirements for the deduction of these expenses are very specific and can be restricted to salespeople, apprentices and employees on commission. Specific eligibility criteria for each of these expenses should be reviewed prior to deducting.

A recent administrative ruling from the CRA also allows employers to provide employees with a tax-free reimbursement of up to $500, supported by receipts, to cover the cost of computer equipment for setting up a home office during the COVID-19 pandemic.¹

Partners and shareholders

Business owners who have not previously worked from home might also have found themselves in a new work-from-home situation due to COVID-19. They might now be eligible to claim a deduction relating to home office expenses.

There are two common ways for business owners to deduct home office expenses:

1. A company or partnership pays rent for the home office space, against which the partner or shareholder deducts expenses.
2. Home office expenses are charged back to the company as a contribution by the shareholder or partner.

In both cases, the company or partnership is the entity claiming the deduction. However, the first approach may result in unintended GST/HST implications.

For home office expenses to be deductible, one of two criteria must be met:

• the workspace is the principal place of business (more than 50 per cent); or
• the workspace is used exclusively for the purpose of earning income from the business and is used on a regular and continuous basis for meeting clients, customers or patients of the business.

In contrast to the deductions available for employees, mortgage interest and CCA can be included as part of the deduction. However, CCA should likely be avoided to prevent future loss of the principal residence deduction.

Over the years, the CRA has issued numerous interpretations and rulings on deducting home office expenses for employees, partners and shareholders. Some of those rulings have resulted in denied claims where the CRA considered that the “more than 50 per cent” requirement was not met. In other cases, the “regular and continuous basis” requirement for meeting with clients and others was the sticking point. CRA Technical Interpretations 2013-0481171E5 and 2009-033751I7 state the CRA’s policy that “meeting customers or other persons” is limited to face-to-face meetings. As with nearly everything related to COVID-19 and the “new normal,” historical approaches may no longer have the same relevance.

Bruce Ball from CPA Canada, in his blog on May 14, 2020, noted that the CRA is reviewing the rules for deductible home office expenses relating to employees and how the rules should apply during COVID-19. He also stated:

From our discussion with the CRA, it appears that the legislative requirement that the home office is “the place where the individual principally performs the duties of the office or employment” could be applied to the period in which COVID-19 measures are in place. This would mean that the requirement would not have to be met for the whole year.

CRA has drafted a simplified version of the T2200 and has started consultations with various stakeholders including CPA Canada to get feedback on the draft simplified form.  There have been discussions with CRA about the need for the T2200 form and the potential administrative burden associated with the filing of millions of such forms. Until the CRA provides further clarification on its administrative policies in light of COVID-19, employees, partners and shareholders should track expenses associated with their home office use and should monitor developments by staying in touch with their Baker Tilly representative.