How to Claim Your Home Office

My income taxes are organized for tax year 2008 and submitted to my accountant.   While going through my business deductions however, I realized that I haven’t posted in detail about how to claim a home office.  Coincidentally, how to claim a home office was a reader question as well.

As I have an online business, I’m eligible to claim my office space within my home.  Basically, a percentage of the expenses listed below can be used to claim against the business income.

What percentage you ask?  Calculate the amount of square footage your office (may include bathroom as well) takes in relation to the livable square footage of your house.  So if your home office is 100 sq. ft, and your living space of your house is 1000 sq. ft, then you can claim 10% of your mortgage, property taxes etc (see list below).

If in the first few years, your business is operating at a loss, the expenses can be claimed against other income.  However, CRA will only allow this to continue for a 2-3 years at which point, they expect you to turn a profit.

Home Office Deductions

  • Mortgage interest
  • Property tax
  • Fire insurance
  • Mortgage life insurance
  • Power bill
  • Internet bill*
  • Business Phone/Cell*
  • Equipment/furniture used for the business **

* 100% of these expenses can be claimed if used solely for the business.

** Some may need to be claimed as capital cost allowance.

An Example

Lets take a look at a situation similar to my own.  The home office is about 10% of my total livable square footage, which means that I can claim 10% of the following (assume that the office is used solely for business):

  • Mortgage interest: $4500 x 10% = $450
  • Property tax: $3000 x 10% = $300
  • Fire insurance: $500 x 10% = $50
  • Mortgage life insurance: $0
  • Utility bill (heat/light): $3000 x 10% = $300

The following deductions are in relation to how much was actually used for the business:

  • Internet bill: $480 x 50% = $240
  • Business Phone/Cell = $0
  • Equipment/furniture used for the business = $300 x 100% = $300

Total Deduction: $1,640

Simply gather some paper work together and start adding together expenses.  Before you know it, you’ll have a fairly significant deduction for your business.  In my case, a $1,640 deduction means that I’ll save about $656 income tax.  If you’re a small business owner, here are some other tax deductions to consider.

Heads up to those those who procrastinate (like me)!  If you have tax owing, the deadline to file is April 30th, 2009.

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Shalon
11 years ago

Both my wife and I have separate rooms which we “each” use as our respective home offices. Since the income generated is different, can we claim home office twice one for each.

I listed the home office once for myself, added all the mortgage information and completed the rest.
Then I added the home office this time for my spouse, added all the mortgage information and completed the rest.

Am I doing this right, please let me know. Thanks.

Colourful Money
12 years ago

You said that the CRA will only allow you to claim businesses expenses at a loss to continue for a 2-3 years at which point, they expect you to turn a profit.

So what if you continue not to profit after that 2-3 year threshold? You can’t simply claim these expenses anymore? Surely they can’t fault you for doing this, if it is legitimate, no?

Chet Kwapisinski
12 years ago

Kiki — no CCA claim on Rental unless it is a business. You cannot claim bathroom ever, please read the Home Office Expenses. Look folks you can claim whatever you want as we have a self assessing system. However you need to understand the rules and apply them. If you are pre or post assessed or potentially audited you will be responsible for back taxes and interest the first time it is uncovered; however the 2nd time, 3rd time the penalties can be very punitive 25%, 505 of back taxes bothe federally and provincially.

Also there is a real misunderstanding on telephone deductions, you cannot deduct any amount for home office expenses for normal landline usage ever. It is viewed by the CRA as an integral part of your home that you would have with or without a business.

If you have a dedicated line- a fax line or landline or cell phone for business, then you can deduct all of those expenses as business expenses completely. That is why you have the telephones etc.. listed on the appropriate form in the section that applies to business activities whethe an employee or self employed. If a home office you must keep records to prove it was a business expense, ie) long distance telephone calls from a home that are business related and can be proved in reviewed are 100% deductible on the appropriate form. The cell phone is also another potential area that needs to be addressed, in other words, the same rules will apply that you would need to prove they are business related. If you use pay as you go, make sure that the card provider tracks the calls and can provide you a list of them. If you cannot, then you cannot prove they were realted to business. The onus of proof and understanding our tax rules is on you as a resident or citizen of Canada. The CRA produces many tax guides and Technical Interpretation Bulletins that address these issues and I encourage everyone to read them.

Enough said on my part… Great forum and FT, I applaud you for your insights and topics.

Cheers

Ray
12 years ago

Thanks for the review on Home Office. I had forgotten 50% of my land line I wasn’t deducting – yeah, I spend a lot of time on the phone for work. My office comes in at 8.9% of the home and doesn’t include a bathroom (damn). Probably too late now to bump the percent to include the bathroom seeing as I’ve already claimed a certain amount the last 3 years running – home offices don’t grow, do they? :)

I’m employed and have had the T2200 signed for the last 3 years. The extra deduction this year saved me $100, w00t.

Kiki
12 years ago

Thanks for all your help. I like this blog, very well written. I will call CRA but now I assume that I can not claim the home office expense.
I am doing my tax right now, I am using form T776 and on there, I claimed my auto expense but I don’t find any place I can claim auto CCA although business form(T2125) allows to do that. Does the rental operation not allow to claim motor CCA? And since I can not claim home office, can I claim CCA on my cost of computer for the rental operation ( on the form T776)? Thks

Chet Kwapisinski
12 years ago

Kiki and FT — just a final comment from me on Home Office Expenses. One way that may help you determine if they may apply in your circumstances is review the appropriate schedules where you report your income and see if there is a provision for calculating home office expenses ie) T777, T2125, T776. These schedules define what expenses may apply over all and then one needs to assess further which ones apply if you are salaried, commissioned or self employed etc…. Cheers

Chet Kwapisinski
12 years ago

Kiki — the answer is “it depends” ; however based on the information you provided it seems that you have income from property and not income from a business. To be considered a business you would have to be generally providing additional services as part of the operations eg) maid services, cleaning services, supplying meals etc….

Factors that are irrelevant in determining whether you have business income are things like the the number of properties, the amount of time spent managing or supervising the units or houses…

Best talk to a professional as it does “depend” but based on what you have outline, my initial take is that you will not be able to claim home office expenses.

Hope that helps.

Cheers

kiki
12 years ago

I have 3 rental properties and I do repair and renovate the rental properties my self. I don’t have other job, I also use the home office to place ads, reseach online or reading stuffs relating to managing rental properties. When I take care my rental propeties, my cost of labour can not be claimed. Can I still claim my home office including computer( depreciation), property tax, utilites,intenet, phone around 10% for manging rental properties? In books, some says I can but some others says I must have active income to claim ( rental imcome is passive or have at least 6 employees) ? Any one knows more about this with CRA, please give it some lights