New Simplified Home Office Deduction
The CRA recognizes that more employees are required to work from home. This may result in additional costs for the employee, which should be allowed as a deduction on their tax returns.
The CRA has issued a new policy in recognition of the special circumstances of the COVID-19 pandemic. Employees working from home over 50% of their work day(s) now have the option of claiming a flat rate of $2 per day worked or providing a detailed breakdown of various qualified expenses directly related to their work. There are rules around both of these approaches which can be found in the following CRA article
In the past, the employer was required to complete and sign form T2200 (Conditions of Employment) which confirmed that the employee was required to incur various types of qualifying expenses, and whether some or all of those expenses were reimbursed. This form is now only required if the employee elects to use the Detailed Method, as described below. Please be aware that this is a very sensitive issue for the CRA, and that they may ask for documents to prove that you paid the expenses in your detailed claim on form T777
New Flat Rate Method for Home Office Expenses
Under the new Temporary Flat Rate Method for Employee Home Office Expenses, the process is simplified.
- Taxpayers are eligible to use this method if they worked from home more than 50% of their work time, for at least 4 consecutive weeks in 2020.
- The CRA requires that you worked at home as a result of the COVID 19 pandemic or that your employer required you to work from home.
- Employees should review their calendars to determine if they qualify.
- Employees who qualify can claim a flat rate of $2 per work day, subject to a maximum claim of $400 for 2020.
- If there are multiple family members working from home, each person may claim on their tax returns $2 per day worked at home, subject to the above noted conditions.
- There is no need to keep receipts to substantiate your claim or to have your employer sign form T2200
- More details can be found on the CRA website in this special article
Detailed Claim for Home Office Expenses
As before, the employer must first complete and sign form t2200-11e Conditions of Employment confirming that the employee was required to incur various qualifying expenditures as a condition of their employment. Furthermore, the amount of expenses reimbursed, if any, must be specified. The employee must work at home over 50% of their work days, as described above.
The taxpayer must determine the size of their defined work space and compare that to the overall size of the home. That fraction will be applied to the various qualifying home office expenses. Please refer to the following CRA article
The expenses that can be claimed by qualifying employees includes electricity, heat, water, home internet access fees, rent, and maintenance and minor repair costs. Commissioned employees are additionally able to claim home insurance, property taxes and the lease costs of a computer and office equipment used to generate commission income. Telephone expenses are eligible subject to various restrictions, as are the costs of home internet. There are specific rules which can be found here.
The expense claim cannot include mortgage interest, principal mortgage payments, furniture, or other capital expenditures that aren’t related to the defined work space
Expanded List of Qualified Office Expenditures
The CRA has expanded the list of qualifying home office expenses to now include envelopes, paper, notebooks, toner, and ink cartridges, folders, paper clips, pens and pencils, highlighters, stamps, stationary, and sticky notes. All of these expenditures should be documented with receipts if making a detailed claim.
However, the following basic items required to work at home are not eligible:
- Computers, laptops, monitors and accessories
- Office furniture
- Calculators or other office equipment
- Scanners or fax machines
- Capital cost allowances (wear and tear) on any of the above capital expenditures
In our opinion, the CRA has not gone far enough. It is insufficient to be able to claim $400 per year in the Flat Rate Method, which represents tax savings of only $100 for most taxpayers (assuming a 25% tax rate)
Individuals who take the extra trouble to keep receipts and get their employers to sign form T2200 are not any better off. This is a very sensitive issue for the CRA, and that they may ask for documents to prove that your paid the expenses in your detailed claim on form T777. Many of our clients don’t keep receipts, but should, which makes it difficult if not impossible to substantiate the home office claim.
Our society is working from home more than ever. I should know as I am now working out of a home office, which has proven to be very successful. However, I am concerned that employers will see the opportunity to have more and more employees work from home, thereby realizing significant savings on office rent, supplies, telephone and internet charges etc. There appears to be a disincentive for employers to have bricks and mortar offices in the future. They are effectively transferring their occupancy expenses to their employees, without sufficient recognition by the CRA of that transference.
This is not to say that the new virtual way of working from home is not working. Many employees love this approach, which is more and more common. They don’t have to travel, or even live close to work, both of which can be costly.
The problem is that the CRA has not yet recognized the effective cost of working from home. It seems ridiculous to allow rent, but not mortgage interest or property taxes; that is a bias against home owners that should not exist. Only being able to claim part of your communication expenses is unfair, especially when the cost of mobile phone plans, and the internet is rising as we speak. It is silly to allow long distance charges only, given that most people have phone packages covering North America or the world. Not being able to claim the cost of computers, webcams, smart phones and furniture used via capital cost allowances is not appropriate because these types of office equipment are essential to working from home.
I urge the CRA to consider its position on home office expenses. It is timely regardless of the pandemic.
Please contact Randy Larson, Tax Expert at Focused Tax Strategies to learn more.