The tax benefits of working from home

Working from home isn’t really a new phenomenon — employees have been doing so for more than 25 years, ever since changes in technology made such remote work arrangements feasible. Over the past two months or so, however, millions of Canadian employees have had to adapt to working from home for the first time. And it seems that an increasing number of companies are deciding that such arrangements can and should be maintained for the longer term, even after they are no longer required for reasons of public health.

There are a lot of advantages to working from home — no one enjoys the daily commute, which is often both expensive and time-consuming. For most Canadians, the opportunity to avoid sitting in traffic gridlock or rushing to catch the commuter train, even for part of the work week, would be a welcome change. And of course, going to an office every day involves costs in addition to the costs of just getting there and back.

A transition to a part-time or full-time work-from-home arrangement does, however, raise a number of questions. In virtually all cases, employees will need to acquire new technology or upgrade their existing technology resources, and the question of who pays for such expenditures will arise. And, while commuting costs may be reduced or even eliminated, there are other monthly costs which will increase including, usually, the cost of upgraded internet access. And, finally, the question of the tax implications of the new working from home arrangement will have to be considered.

Fortunately, Canada’s tax system already has rules in place to govern the tax treatment of expenditures and reimbursements related to home office work. Generally, employees who have a work-from-home space and who foot the bill for costs related to having that space will be entitled to deduct many of those costs when calculating their taxable income for the year. Of course, as with any tax deduction, there are conditions which must be met in order to qualify.

In order to claim a deduction for costs related to a work-from-home space, employees must meet at least one of the following conditions.

• The home work space is where the individual mainly (more than 50% of the time) does his or her work; or
• the individual uses the workspace only to earn his or her employment income. He or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of his or her employment duties.

Once either of these threshold criteria is met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her workspace, such as the cost of electricity, heating, and home maintenance.

Where an individual who qualifies under either of the criteria outlined above is a commission employee, an even broader range of costs become deductible. In addition to costs for electricity, heating, and home maintenance, a commission employee can also deduct a proportionate share of costs incurred for property taxes and home insurance.

There is no specific formula provided for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home, or he or she can make that calculation based on the number of rooms in the house or apartment relative to the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, the Canada Revenue Agency (CRA) can ask the taxpayer to provide documentation and support for claims made.

For example, an employee who lives in a 2,000-square-foot house and uses a 200-square-foot room as a home office can (assuming that at least one of the basic threshold criteria outlined above is satisfied) claim 10% of his or her costs for electricity, heat, and home maintenance (where that maintenance involved the home work space) incurred during the tax year. If that employee works on commission, he or she can also deduct 10% of costs incurred for property taxes and home insurance.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office. Each such employee must file, with the income tax return for the year, a Form T2200. On that form, the employer must certify that the employee was required to use a portion of his or her home for work-related purposes, indicate what percentage of the employee’s duties were carried out at that home office and, finally, confirm that the employee is not being reimbursed for any home office expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

For the 2020 tax year, there is an important exception to the rule that the employee not receive reimbursement for home office-related expenses. The federal government has indicated that, given the unusual circumstances under which most employees have recently begun teleworking, those employees will be entitled to receive up to $500 from their employers to help defray costs of setting up and using a home office. In the CRA’s words “in the context of the COVID-19 crisis, CRA is willing to accept a reimbursement of an amount not exceeding $500 for the purchase of personal computer equipment to be principally for the benefit of the employer”. Consequently, any such $500 amount will not be treated as taxable income to the employee. Although the CRA did not specify, this concession will presumably be effective only for the current tax year.

In order to claim a deduction for home office expenses, the taxpayer must clearly do some paperwork. All employees seeking to make such a claim must total the amount of bills paid over the course of the year for electricity, heat and any of the inevitable home maintenance costs. Those working on commission must also verify amounts paid for property taxes and home insurance. However, given that such efforts will produce a deduction from income for tax purposes for costs which would have been incurred in any case, it is likely that most employees would consider the return on that investment of time well worth it.