Working from Home?
Posted by Gail | Filed under Taxes
It’s April. The flowers are coming up, and so is the tax deadline. What would tax season be without at least one post on how to keep the Tax Man at bay?
I’ve been getting a few questions recently about home offices and tax deductibility. Some people have a home-based business. Some people are employees who spend at least some of their time telecommuting. And then there are the employees – very often salespeople who are working on commission – who must maintain an office at home. It would be great if there were just one set of rules, but it’s never that easy.
To make a home office tax deductible, you must spend more than half your working time there, so that your home office is your “principal place of work.” Alternatively, it can be a space that you’ve designated only for work, in which you regularly meet with your customers. And if your employer requires that you maintain a home office, and has filled out the appropriate paperwork to prove it (Form T2200), you can make a claim.
Employees have to figure out what portion of their homes is being used for their home-office and then claim only that portion of rent, utilities, and maintenance/ repairs. Commissioned salespeople can add in a portion of their property taxes and home insurance. Base the percentage claim either on square footage of the office relative to the square footage of your home or calculate the number of rooms used for work as a proportion of the total number of rooms in the house. Hallways and bathrooms don’t count. Whichever gives you the higher percentage for business is the one that’ll get you the biggest tax bang for your buck.
Self-employed folks get to claim the most stuff. Whether you’re a hairdresser with an in-home salon or a lawyer with an in-home office, you need to keep clear records to show what the expenses relating to business are, so you don’t end up in a He-said-She-said with the Tax Man. And you need to make sure you’re counting all the space you use. For while you might figure the rooms in which you meet with your customers is obvious, if you have a separate room in which you store supplies or records, that would count too. And, of course, the supplies you must buy (even toilet paper, cleaning materials and coffee) that relate to your business hours are also deductible.
You have to be able to back up business expense claims with some form of paperwork, be it a sales invoice, receipt, or some other voucher that supports what you claim you spent. If you pay cash for any business expenses, get receipts that include the vendor’s name and the date. Keep your cancelled cheques as proof that a bill was paid or something was bought. The Tax Man has a list of what you can claim.
Just because you can claim something doesn’t mean you should. Here’s an example of what I mean. While self-employed people can claim a portion of their mortgage interest and depreciation on their home (in tax lingo it’s called the “capital cost allowance, or CCA”), doing so has long-term downsides. Claiming CCA effectively causes the part of your home you’ve claimed for business to lose the capital gains exemption available on a principal residence. So, the business portion of your home would be taxable if you make a profit when you sell your home. Ouch!
If you have a biz or tax situation complicated enough to justify some professional advice, get thee to an accountant. Skimping on professional fees is short-sighted and only ends up costing money in the long run. Get someone who is expert in your field… don’t go to just any old bean-counter. You want a smart, experienced professional who keeps current with the rules and has advice worthy of the fee.
April 16, 2009 at 9:12 am
My wife works from home full-time for an employer, and after we calculated what percentage of our rented 1-bedroom apartment is devoted soley for her work (it added up to 15%) I was surprised to see our additional tax savings increase by around $600.00.
Since we save all of our monthly invoices for utilities, we were also able to claim 15% of the total of those costs towards the tax deduction, too. But it meant having her boss sign and complete the T2200 that we are going to send along with the taxes when we eventually file this weekend.
Timely post, Gail!
I would enjoy reading something about the financial committments (and other social costs as well) involved in making the decision to care for one’s parents in-home some time, just in case you are ever in need of some more article ideas!
April 16, 2009 at 10:20 am
Great points Gail. THere are a lot of details so the best thing you can do is get well acquainted with the deductions right off the bat.
Also. good suggestion to keep clear records. This goes for students, too. There are lots of things you can deduct but if you scramble at the last minute trying to figure out what you have spent on your research expenses, it can be really messy and confusing!
April 16, 2009 at 11:26 am
Using an accountant in situations like this is a great idea to make sure you are within the guidelines; often, they can show you other ways to improve your tax situation, too! And don’t forget that those professional fees are also a deduction!
April 16, 2009 at 1:22 pm
Thank you.
April 16, 2009 at 7:13 pm
I also run a home business…and payed my taxes today. I wouldn’t want to leave it year after year like some people on your show do. The stress of the amount building would make me sick with worry.
April 16, 2009 at 8:15 pm
@Dave: I seem to remember reading that you don’t mail the T2200 form in, you have to keep it so that you have it in case they ask to see it. (I could be wrong.)
April 17, 2009 at 2:30 pm
Gail – mortgage interest is not a capital expense; claiming a portion of your mortgage interest as a self-employed person does not affect the capital gains exemption on your home!
April 17, 2009 at 3:36 pm
I have worked from home for many years and also have a lot of experience dealing with small, mini and micro businesses. Not as a professional but as the gopher.
I worked for a very successful tax accountant who was a genius but also
nuttier than a squirrel’s fruit cake. I started off as a receptionist but since a trained monkey can type better than I and could not help but have better customer relation skills I was soon “promoted” to Bookkeeping Clerk with my own office in what was the storage and broom cupboard.
My job was to Co-ordinate Client Container Accounts. Fancy way of saying that whenever a client brought in a years worth of paperwork in a cardboard box I was the one who got to sort it all out. And it is amazing how many business people use the box it and dump it system of bookkeeping.
My boss did the taxes for everyone – from doctors, lawyers, Indian Chiefs, butchers, bakers and candle makers (actually just a bee keeper) to politicians, firemen, orchardists, millionaires, little old ladies, students and strippers. He taught me to treat our client’s taxes as if they were our own. I learned three main things from him as far as business taxes go.
One: Keep accurate and very neat records. Every spring I get a phone call from my best friend who always wants to leave her husband and move in with us. They are still incapable of keeping ANY financial records for their business so every year they start panicking and fighting around April 1st.
If you are running a small business you don’t have to be able to work a computer but you do have to be able to use a pencil, adding machine and book with columns in it and set aside time to keep records every month. Every week would be better and every day would be best. Often and regularly makes it all faster and easier in the long run. My boss worked for Revenue Canada for decades and he said nothing annoys an auditor more or makes them more nit picky than having to deal with a bookkeeping mess. And if you hand a mess to a bookkeeper or accountant expect to pay more according to the size of the mess and the dangers involved. He once charged an Orchardist an extra $200 for lost time, pain and suffering. At the bottom of this man’s giant box of papers was a black widow spider’s nest. I didn’t get bitten but in my hysterical attempt to exit the cupboard I tripped, hit my head on a file cabinet and stunned myself. My boss said he couldn’t really see much difference in my new stunned look as compared to the regular one but God punished him for being so rude. He had to spend hours trying to catch the spider and actually show me the body before I would get back to work. Now I come to think of it my vision was still very blurry at the time and for all I know he could have been showing me a dried up old raisin.
Two: Get good advice and don’t be cheap about it. If your business/financial affairs are complex be willing to pay for professional help. A pro will always save you money and jail time.
Anyone can get information from Revenue Canada but the expertise comes in knowing what to do with the info because taxation is a very tricky business and contrary to belief nothing is cast in stone – except the hearts of the auditors of course.
The information papers you get from Revenue Canada are called “Interpretation Bulletins”. Now according to my boss and the dictionary the word “interpretation” means “An explanation of something that is not immediately obvious” as in “the edict was subject to many interpretations” or an explanation of the meaning of some object of attention. It also refers to making ideas more understandable including translation. An interpretation may express ones’ own understanding of things.”
Soooo – when THEY say you cannot claim articles of clothing as a business expense that may be the case in many cases but apparently a G-string can be claimed as its function can be interpreted as part of a professional uniform and not just as sexy underwear.
Three: If your small business isn’t so small pay your PST and GST on time and put 20 to 30% of your gross income aside for income tax depending on if you have other sources of income or not. The 20-30% may seem like a lot but if it is earning you interest you win and if you need it you will already have it. And if it is not all used for taxes you will have left overs. Found money that no one in the history of the world has ever had trouble spending or saving elsewhere.
April 26, 2009 at 12:23 pm
What about claiming a portion of the property taxes? Would that lead to the same tax problems after selling the house?
April 26, 2009 at 1:07 pm
Hi, the sentence that Gail had in her article was a bit confusing about the deductibility of house costs.
Mortgage interest, property taxes, maintenance, utilities, security, cleaning are all deductible for self – employed persons.
The depreciation (or CCA) is allowable but never ever ever recommended because as Gail indicates, it messes with your tax free sale of a principal residence. And I never recommend CCA on property because usually the value goes up and there is recapture (bringing it all back again.)
By the way, the deductions apply for babysitters too. I don’t understand why so many don’t want to claim the income because once all the expenses are in, the result is often zero anyway. There is a separate guide for daycare providers and the house calculation is done differently (based on hours rather than space).
Anyway, with 4 days left to the deadline I should get back to work!!!!
Susan
April 27, 2009 at 4:20 pm
I phoned CRA this morning and they have verified that I can claim mortgage interest and property taxes with no problem when I sell my house, but that it is indeed CCA that is the problem. (Hey, they told me I could even claim the cost of my security system! I’m paying a lot less tax than I thought I would!)
April 26, 2010 at 2:10 pm
I am retired but still get the occasional part time work and I still maintain a home office. Can I claim my home office if I only work 3 to 6 months a year but use the office to search the internet for work and use a printer to print up flyers or resumes?? Thank you for your help jsr