The taxing experience of working at home
A home office can bring significant deductions, if you remember to claim them

Robert Gauthier, is one of the top marketing strategists on the Quebec scene, who over the years has seen and done it all. But don't ask him about his income taxes.

"You want to know how much I deduct for office expenses?" Gauthier asked. "To be honest, I don't have a clue. I just give all that to my accountant and he takes care of it."

Gauthier runs a consulting business out of his Laval house and is typical of the millions of Canadians who are increasingly using home offices, whether they be self-employed, home workers, or merely traditional employees that take their work home at night.

Although many extol the benefits of a home office, few are aware of the often-considerable tax benefits they can provide. "There are a lot of advantages of working at home," said Gauthier. "You save money on rent, you avoid company politics and you don't waste a lot of time in traffic."

Gauthier does spend a fair amount of time on the road meeting clients, but he drives in off peak hours. That time saved is crucial, because he works between 55 and 60 hours a week. But while Gauthier may not worry about the tax consequences of working at home, according to one accountant it pays to familiarize yourself with the nitty-gritty.

"The laws regarding tax deductions for home offices are tricky," said Michel Trudel, a chartered accountant and partner in the firm Fauteux, Bruno, Bussière, Leewarden. "If you don't watch out, you might either forget to make deductions, or you might make disallowed deductions by mistake."

Trudel is not kidding. Life almost all tax provisions, those dealing home offices are filled with technical jargon, multiple cross-references, exceptions and double negatives, making them hard for the layman to understand.

But it pays to try. According to Martel, the tax code makes a distinction between those who operate a business out of their home, and those who are employed elsewhere who merely have a home office.

"In general the system favors those who generate income from their home," Trudel said. "Those who have home businesses benefit more than those who work out of their house but are employed elsewhere."

According to Martel, those who run a business out of their house can deduct a portion of traditional household expenses such as municipal taxes, heating, electricity and mortgage interest. The proportion is based on the amount of square feet used exclusively for business purposes.

For example someone with a 1,000 square feet of living space in their house, who used a 100 square foot office exclusively for work could deduct 10 per cent of allowable household expenses.

But Martel stresses two points. The first is that the space must be used exclusively for business purposes. That means those who are thinking about deducting the cost of their living room, because they occasionally meet a client there, had better forget it.

Martel also counsels those making deductions to keep all relevant receipts for at least six years, in case these expenses need to be justified to an auditor.

One allowable expense that Martel advises clients not to deduct is depreciation. Clients that do so will have to reverse the deduction when they sell the home through a process called recaptured depreciation, and they will be ineligible for the capital gains exemption on that portion of their home.

Martel also cautions that home office deductions cannot be used to create a business loss. "If you have someone that earns $300 am year running an Amway distributorship out of their house, and they think that they can deduct $3,000 of home office expenses, they had better think again."

Unfortunately those who have traditional jobs, yet who work at home are ineligible to deduct traditional expenses associated with owning a home said Martel, the one exception being commissioned salesmen. Ironically those who rent an apartment can deduct a portion.

However if the employer files a special notice with tax authorities, those with traditional jobs who work at home, can deduct other expenses associated with home offices such as equipment, furniture and a computer.

They can also deduct a part of their home phone line, Internet and fax connections, based on the percentage of time they are used for business purposes.

Quantifying the number of Canadians using a home office is not easy because there aren't any precise statistics. However a good starting point would be to take the 2.3 million Canadians who according to Statistics Canada, worked for themselves during 2002, yet had no employees.

The total does not include those who are self-employed who rent offices outside the home, nor does it include those who are employed elsewhere yet work out of their home. But whatever the total number of Canadians with home offices is, it's a lot. And experts say the number is growing.

"The workforce is getting older, and many people are getting ready to retire," Gauthier said. "But companies still need the skills that they provide. So you are going to see a lot more part-time home workers in the future."

For more information about the tax consequences of using home offices, check out CCRA's Web-site at: www.ccra.gov.ca


Photo caption: Today many business executives such as Robert Gauthier, president of Formaplans Marketing have home offices, which can generate significant tax advantages.

 

Sidebar: Tax deductions for home offices to Michel Trudel

People who operate businesses out of their houses can deduct a portion of their costs based on the portion of space they use for business purposes.

o In general these costs include mortgage interest, power, heating, municipal taxes.
o Deducting depreciation is not recommended because the deduction will be added back when the home is sold, and the capital gains exemption will be waived on part of the home.
o The amount deducted cannot exceed the amount of revenue generated and it's important to keep all receipts.

In general the tax laws governing deductions for home offices for employees who have full-time jobs are strict.

o Employees cannot deduct the costs associated with the home office such as mortgage interest, depreciation, insurance heating, taxes and so on. Rent however can be deducted.
o However if the employer files a T2200 form with the tax authorities that states the employee is required to have a home office as an employment condition, the employee may deduct certain expenses such as depreciation on a computer, furniture, equipment and so on.
o If the employee also uses dedicated phone, fax and Internet line, he may deduct cost associated with these. If he use his personal telecom lines for work he may deduct a portion of the cost based on the amount they are used for work purposes.

 

 

 

peter@peterdiekmeyer.com

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