Self-Employed and Run a Business Out of Your Home: What You Can Claim?

Who Can Qualify to Claim Home Expenses with the CRA?

To qualify for claiming home office expenses with the Canada Revenue Agency (CRA), you must meet certain conditions, whether you’re self-employed or an employee.

1. For Self-Employed Individuals:

   • You must regularly use part of your home exclusively to earn business income, and
   • The space must be used as your principal place of business, or
   • You must use the space only to meet clients, customers, or patients on a regular basis.

2. For Employees (Including Commissioned Employees):

   • You must be required by your employment contract to work from home, and
   • You must have a T2200 form (Declaration of Conditions of Employment) signed by your employer, certifying that you are required to maintain a home office to perform your duties, and
   • Your home office must be your principal place of work or the space must be used exclusively for earning employment income and regularly meeting clients or customers.

What Qualifies as Business Use of Home Expenses?

Business use of home expenses refers to costs incurred while using a portion of your home exclusively for business purposes. These expenses may include:

1. Utilities: You can deduct a portion of your home's utility bills, such as electricity, heating, water, and internet, based on the proportion of your home used for business activities.

2. Property Taxes: A portion of your property taxes that reflects the business use portion of your home is deductible.

3. Home Insurance: Similar to property taxes, you can deduct a portion of your home insurance premiums related to the business use of your home.

4. Mortgage Interest: If you're a homeowner with a mortgage, you can deduct a portion of the interest paid on your mortgage loan proportional to the business use of your home.

5. Maintenance and Repairs: Costs associated with maintaining and repairing your home, such as painting, renovations, and repairs, can be partially deductible if they are incurred for the business portion of your home.

6. Rent: If you're a tenant, a portion of your rent payments attributable to the business use of your rental property may be deductible.

Calculating and Claiming Business Use of Home Expenses:

To claim deductions for business use of home expenses, you must determine the percentage of your home used exclusively for business purposes. This is typically calculated by dividing the square footage of your home office or business space by the total square footage of your home.

Once you've determined the percentage, you can apply it to the total amount of eligible expenses incurred throughout the year. Keep detailed records of your expenses and maintain documentation to support your claims in case of an audit.

Example:

Let's say you operate a small consulting business from your home office, which occupies 200 square feet of your total home space of 1,000 square feet. Here's how you might calculate and claim your business-use-of-home expenses:

1. Calculate the Percentage of Business Use:

   • Home Office Area: 200 square feet

   • Total Home Area: 1,000 square feet

   • Percentage of Business Use: (200 sq ft / 1,000 sq ft) * 100 = 20%

2. Determine Total Expenses Incurred:

   • Utilities (e.g., electricity, internet): $1,200 per year

   • Property Taxes: $3,000 per year

   • Home Insurance Premiums: $800 per year

   • Mortgage Interest: $6,000 per year

   • Maintenance and Repairs: $1,500 per year

   • Total Expenses: $1,200 + $3,000 + $800 + $6,000 + $1,500 = $12,500 per year

3. Calculate Deductible Amount:

   • Utilities: $1,200 * 20% = $240

   • Property Taxes: $3,000 * 20% = $600

   • Home Insurance: $800 * 20% = $160

   • Mortgage Interest: $6,000 * 20% = $1,200

   • Maintenance and Repairs: $1,500 * 20% = $300

   • Total Deductible Amount: $240 + $600 + $160 + $1,200 + $300 = $2,500 per year

In this example, you would be eligible to claim $2,500 per year as business-use-of-home expenses on your tax return. Remember to keep detailed records and documentation to support your claims in case of an audit.

Carry-Over and Limits:

If your business-use-of-home expenses exceed your business income in a given tax year, you may be able to carry over the unused portion of the expenses to future tax years. However, there are limits and restrictions on the amount that can be carried forward, so it's essential to consult with a tax professional to understand your specific situation.

Navigating the complexities of business use of home expenses and maximizing your tax deductions can be challenging. If you're unsure about your eligibility or how to claim these expenses correctly, consider consulting with a qualified tax professional or accountant. At Toro Financial, we specialize in helping small business owners optimize their tax strategies and minimize their tax liabilities. Book a free consultation with us today to discuss your business's unique needs and how we can help you achieve your financial goals.