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	WORKSPACE IN THE HOME - WHAT'S DEDUCTIBLE? As we begin the last quarter of the millennium, in this age of information technology, one of the things I've noticed is an increase in the number of home offices. More and more self-employed businesses are setting up their headquarters out of the owner's home. Employers are also encouraging employees to move out of their cubicle in the downtown office tower, and into their "wired" home office. Companies are realizing that employees are usually more comfortable at home, and thus more productive. With faxes, modems, scanners, high-speed Internet access, video conferencing, etc., corporations can save huge dollars on office rent by having their employees work out of their home. So I thought I'd take a look at how the Canada Revenue Agency views home offices and the rules that apply to them. Home offices have to be separated right away into two distinct groups; 1) Home office for a Business or Self-employed person, and 2) Employees whose home is their qualified workspace. The tax rules apply differently to each situation. 1) A home office for the business owner or self-employed is one where the individual uses the workspace in the home as their principal place of business. The home office must be used exclusively and on a regular and continuous basis, for meeting clients, customers or patients. The expenses that relate to the home office are deducted based upon the proportionate space in the home that the office occupies. So typically, if a home office is set up in a 200 square foot room, of a 2000 square foot house. The taxpayer would write off 10% of the qualified expenses. The qualified expenses of a home office for a self-employed, include, but are not limited to: rent, mortgage interest (not principal), property taxes, house insurance, utilities (heat, lights, water, electricity, telephone), maintenance and repairs (as they relate to the home office only). If you put a swimming pool in your backyard that doesn't count. Other expenses that MAY be considered deductible are cable, home phone long distance, and newspaper & magazine subscriptions. As long as you can justify that they relate to the business, and were "incurred in the pursuit of business income". It's usually NOT advisable to claim CCA (depreciation) on the home itself, since that portion of the home would then lose its principal residence exemption when the home is sold. It would mean that if you sell your home for more than you paid for it, part of the profit would become a taxable capital gain. If an individual were to claim 50% or more of their house as a home office, OR make major structural changes to accommodate the business. It would trigger the "change in use" rule, which would remove the principal residence exemption from the home, entirely. You probably don't want to do that. One final point; on the business' annual income and expense statement, home office expenses get deducted LAST. So if the business is already in a loss position before deducting the home office expenses; they can't be used in that year. The unused amount can be carried forward and claimed in future years, against related business income. 2) Employees whose home is their qualified workspace. If the employer has agreed to allow the employee to work out of their home. The first thing that the employee must get is a form T2200, completed and signed by the employer. This form details exactly what the employee is required to provide for themselves, to carry out the duties of their job, (i.e. automobile costs, home office); and what the employer has specifically provided or re-imbursed the employee for, (i.e. car allowance, expense account). It is critical that the employee get this form signed well in advance of filing their tax return. I've seen many times were an employee failed to get this form completed and signed, and CRA then denied all their employment expenses. Employers are often reluctant to sign the form, after the fact. Deductible home office expenses for employees are more restrictive than those for self-employed/business. The qualified expenses for employees are the proportionate rent, maintenance, utilities and minor repairs. These expenses are also prorated based on space occupied in the home. However, the three largest home office costs, (mortgage interest, property taxes, and house insurance) are NOT deductible by employees with home offices. If commissions based upon sales volume compensate the employee, (either solely or partly), only then can they deduct property taxes and house insurance, from a home office. No employee can deduct mortgage interest. If, after deducting all other employment expenses, an employees home office expenses exceed their employment income, (usually not a good sign), the excess is denied in the current year. It can however be carried forward indefinitely against future income from the same employment. One final note on workspace in the home. If the employee is claiming home office expenses on which they paid HST/GST; then they may be entitled to claim a refund for the business use portion of the HST/GST paid. The employee must fill out a form GST-370, and include it with their return. Of course the rebate then has to be claimed as income by the employee, in the year it was received.
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