December 22, 2020
Employees may be able to claim a home office expense if they worked from home due to the pandemic. In 2020, many employees that do not normally work from home did so either because their normal workplace was closed, they needed to care for family members or, were isolating due to health concerns.
There is a common misconception that if an employee works from their home office at all, they are entitled to claim a deduction. In fact, the Income Tax Act normally has severe restrictions on the ability to do so.
Consistent with earlier statements, the Canada Revenue Agency recently announced relaxed rules that will allow many employees to claim some home office expenses even if they would not normally be entitled to make such a claim.
THE RULES PRIOR TO 2020
Prior to 2020, for an employee to claim home office expenses the following requirements needed to be met:
- The employer certified that the home office was a requirement of work, and
- The workspace was primarily where employment or business activities were carried out, or
- The workplace was used exclusively to earn income and was regularly and continuously used for meeting customers or suppliers.
The first alternative required that a home office be used more than any workspace available to at the employer’s or at a business location. Historically this test has been looked at over the course of a calendar year rather than month-by-month or day-by-day. This requirement would be problematic for employees in 2020 working from home temporarily.
The second alternative required that the home workspace not be used for any other purposes and meetings with customers or suppliers be conducted at that site. The CRA clarified that virtual meetings do not qualify as meeting people at a home office. It seems unlikely that this test can be met for employees working from home temporarily.
Assuming you met one of the above requirements, the total expenditures incurred for your home were prorated based on the proportion that your workspace was of your total home’s usable space. If the workspace was not exclusively used for earning income, the costs would be further prorated based on the business versus personal usage. For expenses to be deductible they were required to either relate to the home as a whole or relate specifically to the office. For instance, repairs to the kitchen would not be prorated as home expenses for this purpose.
Employees have been limited as to the nature of the expenses they may claim. Eligible deductions include utilities, maintenance costs and apartment rent. Depreciation and mortgage interest are not eligible and property taxes and insurance can only be deducted if the employee earns commission income. Employees are also not entitled to deduct the cost of any long-term assets like computers and furniture.
The allowable expenses would be reduced by any reimbursement received from the employer.
CHANGES FOR 2020
Due to the COVID-19 situation everyone has been encouraged to work from home whenever possible by the government and, in many cases, their employers. As the aforementioned rules do not accommodate temporary home offices, several changes have been announced by the CRA.
Reimbursement of Capital Costs
The CRA has indicated that an employer can reimburse an employee up to $500 for office furniture or computers and no taxable benefit will arise. A reimbursement means that the employee must provide a receipt for the purchase to the employer. A flat $500 payment to employees with no corresponding receipt would be considered a taxable benefit.
$400 Deduction for Home Office – Temporary Flat Rate Method
On December 15, 2020 CRA announced a simplified method for claiming home office expenses, which is only to be used in the 2020 tax year if you worked from home due to the COVID-19 pandemic. The simplified flat rate method will allow each individual who worked from home (if multiple people worked from the same home, they are also eligible for this rate) to claim $2 for each day they worked at home up to a maximum of $400 (200 working days).
Number of days worked from home in 2020 due to COVID-19 x $2.00
Eligibility requirements for the flat rate method are:
- Worked from home in 2020 due to COVID-19 pandemic,
- Worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 (once this four-week test has been met, all other days working at home due to COVID-19 will count),
- You are only claiming home office expenses and are not claiming any additional employment expenses,
- Your employer did not reimburse you for all of your home office expenses.
What counts as a work day:
- Days you worked full-time hours from home
- Days you worked part-time hours from home
Days that cannot be counted as a workday:
- Days off
- Vacation days
- Sick leave days
- Other leave or absence
Unlike the detailed method there is no requirement for the following items:
- You do not have to calculate the size of your workspace
- You do not have to keep supporting documentation of expenses
- You do not have to complete and sign Form T2200S (Short) or Form T2200
When using this method, the expense will be claimed on Option 1 Temporary Flat Rate Method of Form T777S – Statement of Employment Expenses for Working at Home Due to COVID-19.
Changes to the Normal Rules
Employees eligible for the flat rate method can instead claim their expenses using the detailed method with some changes from the general rules. There are no changes to the requirements for keeping supporting documentation of expenses, or the calculations of the size of your workspace.
The changes are as follows:
- Can use simplified Form T2200S that only requires the employer to answer three questions:
- Did this employee work from home due to COVID-19?
- Did you or will you reimburse this employee for any of their home office expenses?
- Was the amount included on this employee’s T4 slip?
- Can claim expenses on Form T777S – Statement of Employment Expenses for Working at Home Due to COVID-19.
- CRA will accept an electronic signature on the Form T2200S and Form T2200 to reduce the necessity for employees and employers to meet in person (only applicable for the 2020 tax year)
The CRA has also created an online calculator HERE to help individuals claim the home office deductions they are entitled to.
Changes to Eligible Expenses
CRA has also announced that they have expanded the list of eligible expenses that can be claimed to include home internet access fees. There are a total of 59 items indicating what can and cannot be claimed. This list can be found HERE under “New Eligible Expenses”.
If you have any questions concerning the above, do not hesitate to contact your trusted advisor at Wilkinson & Company LLP.
To review any of our previous updates on COVID-19 please see our website.
This summary deals with proposed matters that are complex and may not apply to particular facts and circumstances. As well, the material and the references contained therein reflect laws and practices which are subject to change. For these reasons, this material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter.
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