(From the January 2021 Edition of eFORUM)
By Jamie Golombek and Debbie Pearl-Weinberg
With many advisors and their clients working from home for much of 2020 as a result of the COVID-19 pandemic, thoughts of juicy home office expense deductions began percolating in many minds. But how much can you claim? New for 2020, the government has provided details on two methods for claiming home office expenses as a result of COVID-19.1
General Requirements to Claim Home Office Expenses
To be entitled to deduct home office expenses, an employee must be “required by the contract of employment” to maintain the office. The Canada Revenue Agency (CRA) has confirmed that, for 2020, this need not be part of the contract of employment, and it will be sufficient if there is a verbal or written agreement, including where the employee was provided with a choice to work from home.
Additionally, the home work space must be either where the employee “principally” (more than 50% of the time) performs her duties of employment or be used exclusively to meet customers on a regular and continuous basis in the course of employment. The CRA has clarified that this first condition will be satisfied in 2020 if an employee worked more than 50% of the time from home for at least four consecutive weeks.
Temporary Flat Rate Method
Under the temporary flat rate method, an employee can simply claim $2 for each day they worked from home due to the COVID-19 pandemic, up to a maximum of $400 (for 200 working days) without tracking any specific expenses. Multiple people working from the same home can each make a claim. All days worked from home, either full-time or part-time, count. Vacation days, sick days, or days on a leave of absence do not.
Employees must complete CRA Form T777S – Statement of Employment Expenses for Working at Home Due to COVID-19, and attach the form to their 2020 income tax return. Employees are not required to obtain a CRA Form T2200 from their employer.
This method cannot be used if the employee is claiming any other employment expenses, such as automobile expenses.
Under the detailed method, an employee must calculate all eligible expenses and can only claim expenses for the part of the year that they worked from home.
Employees must complete either CRA Form T777S or T7772 and file it with their income tax returns. The employee must also obtain a signed Form T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19 from their employer3. This form is shorter and requires less information than the T2200 form that was required in previous years. The employee is not required to attach this form to their tax return, but must keep it in case the CRA asks to review it.
What Home Office Expenses Can be Claimed?
Under the detailed method many eligible expenses qualify, such as the cost of utilities, rent, maintenance, minor repair costs, and Internet access fees. Mortgage interest, property taxes, home insurance4, capital expenses or depreciation (capital cost allowance) do not qualify. That means the cost of a new, ergonomic office chair won’t be deductible, nor would the cost of a large, widescreen monitor, both of which would be considered capital expenses. The cost of many office supplies, such as envelopes, paper, pens, and sticky notes, are also deductible.
For utilities, rent, and other mixed-use expenses, employees need to allocate the expenses on a “reasonable basis” to determine the portion related to employment use. This is typically done by taking the area of the work space divided by the total finished area (including hallways, bathrooms, kitchens, etc.) of the home. For 2020, the CRA has introduced an online calculator5 that can be used by employees to determine the appropriate claim for home office expenses.
Allowances and Reimbursements
An employee can claim home office expenses using the detailed method even if they were reimbursed by their employer for some of their expenses. They cannot, however, claim a deduction for any expenses that were (or will be) reimbursed by their employer.
To facilitate working from home during the pandemic, some employers assisted their employees in covering the cost of expenses such as upgrading home computers, or purchasing headsets to facilitate Zoom meetings. An allowance and reimbursement are similar, but the main difference is that with the former, there’s generally no direct, dollar-for-dollar relationship between the allowance paid and the actual costs incurred by the employee.
The CRA treats a general allowance paid to an employee as a taxable benefit. Reimbursements primarily for the benefit of the employer are not considered to be a taxable benefit. In the context of COVID-19, the CRA has stated that it would be “prepared to accept that the reimbursement, of an amount of up to $500 (if a supporting receipt is provided)” for the purchase of personal computer equipment and home office furniture “to enable the employee to immediately and properly perform his or her work duties, primarily benefits the employer” and will not be a taxable benefit. The $500 reimbursement amount is the maximum for each employee, rather than for each piece of computer or office equipment that an employee may purchase.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, tax & estate planning with CIBC Private Wealth Management in Toronto. Debbie Pearl-Weinberg, LLB is the Executive Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto. They can be reached at firstname.lastname@example.org and email@example.com.
1. See “Introducing a simplified process for claiming the home office expenses for Canadians working from home due to the COVID-19 pandemic” at canada.ca/en/revenue-agency/news/2020/12/introducing-a-simplified-process-for-claiming-the-home-office-expenses-for-canadians-working-from-home-due-to-the-covid-19-pandemic.html. Revenue Quebec has also provided details on their process at https://www.revenuquebec.ca/en/coronavirus-disease-covid-19/faq-for-individuals/.
2. If you claim additional employment expenses, “Form T777 – Statement of Employment Expenses” must be used.
3. Where an employee is required to pay for expenses other than home office expenses, “Form T2200 – Declaration of Conditions of Employment” must instead be used.
4. Home insurance and property taxes may be deducted by commissioned sales employees only.
5. CRA’s calculator to determine the employment-use amounts to enter on Form T777S can be found online at canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-229-other-employment-expenses/work-space-home-expenses/calculate-expenses.html.