Background:
Base on gross business income earned, home office business expenses may be deducted from business income. The business expenses that are allowed to be deducted, among other, include the prorated portion of rent, capital cost allowance, property insurance, property taxes, mortgage interest, and operating costs such as heating and lighting. These expenses must be apportioned between the individual’s business and personal use. Work space expenses cannot generate a loss from the business, but any excess expenses can be carried forward and deducted in the following year.
The apportionment must be made on a reasonable basis, such as square feet or meters of floor space used.
Criteria to meet:
- the work space is your principal place of business; or
- the work space is used exclusively for the purpose of earning income from business and is used on a regular and continuous basis for meeting the clients, customers or patients of your business.
- the amount you may otherwise deduct is limited to the income from the business before claiming any deductions for work space in your home.
- Any expenses for a year which are allowable but in excess of amounts deductible may be carried forward from year to year and applied against income of the same business.
In Ryan v. The Queen, 2006 DTC 2738 (TCC) The taxpayer performed physiotherapy in two clinics. Since most of his work for one of the clinics was done from his home office, it was his principal place of business for that clinic. The same could not be said for the other clinic, but his home office was used exclusively to earn business income and was used on a regular and continuous basis for meeting clients. Therefore, home office expenses were deductible.
In Murphy v. The Queen, 2010 DTC (TCC), The Court accepted the CRA’s 17%, instead of the taxpayer’s 26%, as the correct percentage to use in calculating home office expenses. The taxpayer could not ignore the basement when determining the square footage of her home.
In Khoury v. The Queen, 2006 DTC 3682 (TCC), The taxpayer was an artist whose only place of business was his home. He claimed that 50% of his home was used for business purposes. The Minister reduced this to 20% but the Court found this to be too low since it failed to consider the fact that virtually all of the basement space was being used exclusively for business purposes. The appropriate percentage was 40%.
Important consideration:
Although “Principal place of business is not defined in the Income Tax Act, if an individual’s work space is the only “office” used in the business, the work space will qualify as the individual’s principal place of business even if much of the business’ activities are carried on outside of the work space. However, if the individual has another office in addition to a home work space, the latter should qualify as the individual’s principal place of business if a majority of the normal office functions of the business are carried out in the work space.
Resources: Income Tax Folio S4-F2-C2 and sections 248(1)”self-contained domestic establishment” and 18(12) of the Income Tax Act.