In light of Covid-19, many employees have had to work from home for a large portion of the 2020 calendar year. Therefore, there is the possibility for employees to claim a home office deduction in calculating their 2020 personal taxes.
Ordinarily, if an employee maintains an office in their home, the employee could deduct certain costs if one of the following two conditions are met:
- The workspace is the employee’s principal place of where employment duties are performed, or
- The workspace is used exclusively for the purpose of earning income from employment and used on a regular and continuous basis for meeting clients, customers or patients of the individual in the course of employment.
The first condition relies on the workspace being used as the employee’s “principal” place of carrying out employment duties. The Canada Revenue Agency has stated that it will accept that an employee principally works in the workspace if the employee spends at least 50% of their time carrying out employment duties in the space. It is important to note that there is no clear guidance, as of yet, as to whether the measure of time is applied on an annual basis or over a defined period.
If either of the above conditions are met, an employee is required to have an executed Form T2200 – Declarations of Conditions of Employment for every year they deduct home office expenses.
The home office expenses that can be deducted are operating type costs such as heating, electricity, and water, as well as rent and maintenance costs. Additionally, if the employee is a commissioned salesperson, property taxes and home insurance are deductible. Deductible expenses do not include renovations or fixed asset purchases such as office furniture.
The home office expenses must be prorated based on the workspace area relative to the size of the home or rental space. The remaining portion of the costs are considered personal and are specifically excluded from the deduction.
Typically, the portion of the expenses that relate to the workspace is calculated by dividing the square footage of the workspace by the total square footage of the home. However, if the first condition above is used to qualify for the home office expense deduction, the calculation to arrive at the deductible amount of home office expenses must take into account the amount of time spent in the work space carrying out employment duties. Therefore, if 70% of the employment duties are carried out in the home office, then 70% of the pro rated workspace costs are deductible.
For 2020, many employers will be requested to provide Form T2200 – Declaration of Conditions of Employment. This will put a time burden on employers as they will be required to prepare each form individually for each employee In addition, the vague time frame associated with the first condition mentioned above creates uncertainty and a decision will have to be made as employees will be asking for the form. It is up to the employer to decide if the form will be provided.
In light of these and other questions, CPA Canada, at the time of writing of this article, is in consultation with the Canada Revenue Agency in an effort to assist employers and employees with the requirements associated with home office expenses to ensure streamlined compliance.