Almost all of us have been working from home during the COVID-19 pandemic and many of us will continue to work from home for some time to come. Google just announced that it is going to have its employees work from home for at least the next year, and personally I have no immediate plans to bring all my employees back to my office. I may decide to have some employees work from home forever.
If you are working from home, and even if you have just worked from home for a period of time and have since returned to your place of employment, you will want to take advantage of all the possible ways in which you can reduce your taxes. And if you’re creative you can reduce your taxes substantially.
If you are self-employed
If you are self-employed you know that you are entitled to claim deductions for business expenses.
The rule of thumb is that as a self-employed individual you are entitled to claim as a deduction any reasonable expense which has a legitimate business purpose.
You don’t need special permission to do this. It is your right as a self-employed individual.
This is not the case, however, for those who are employees.
If you are an employee
Just because you are an employee of a company does not mean that you do not have the opportunity to reduce your taxes by working from home. Au contraire, my friend. In fact, as an employee who is required to work from home you may be entitled to claim a number of deductions.
But before we go into the deductions you may be entitled to claim if you are entitled to claim them, we first need to ensure you are in fact able to claim the deductions at all.
Not all employees can claim deductions in respect of “Employment Expenses.” This privilege is strictly reserved for those who have a T2200 form, otherwise known as a “Declaration of Conditions of Employment” form, completed and executed by their employer.
What is this T2200 form, you ask? Good question.
For an employee whose employer requires them to pay for certain expenses while carrying out the duties of employment, the T2200 form outlines which expenses an employee is required to pay for and whether (and how much) reimbursement is provided. Once completed and signed by the employer an employee can deduct from their income the expenses outlined by the employer, which of course are subject to any reimbursements or allowances that the employee has received in respect of these expenses.
So generally speaking, if an employee spent $1,000 in a year on required expenses and was reimbursed $300, they would be able to deduct $700 from their taxable income.
These deductible expenses may include travel expenses, vehicle expenses, office rental, assistants’ wages, costs for supplies used directly in your work, cell phone, Internet, phone line, home office costs and any other expenses for which you did not receive an allowance or reimbursement.
As you can see, the sky is the limit in terms of how working from home can save you tax dollars.
For example, if you normally have an assistant at work who helps you accomplish your daily tasks, and if you have been deprived of the assistant due to working from home, you may be able to hire your otherwise unemployed spouse as your assistant. You can do the same with your kids. The first $10,783 (Ontario 2020) of their income will be tax-free in their hands if they have no other income, and this will reduce your overall tax.
The more you pay your spouse and your kids, and the higher your tax bracket, the more tax you can save. But you must pay a reasonable amount for the work done (i.e., the same amount that you would have paid somebody who is not your spouse). And the work done has to be legit.
If you are claiming home office expenses remember to keep records. This is an area that is highly audited.
The rule is that if your T2200 indicates that you are required to have a home office, you can claim a percentage of your carrying costs for your home. And the percentage that you can claim is related to percentage of your home used for business purposes.
So if you have a 1,000-square-foot home and you use a 110-square-foot room for your home office, then you can claim 11 per cent of your carrying costs. In the case of a rental home you can claim 11 per cent of your rent, heat, power and insurance. If you own your home you could claim 11 per cent of your mortgage interest, property tax, heat, power and insurance.
While there are many items that you can claim and justify in the case of an audit, it is best not to claim 11 per cent of your gardening expenses and swimming pool maintenance, etc. as well as other questionable items that are likely to be denied by an auditor.
Taxpayers routinely get into trouble with the Canada Revenue Agency (CRA) with respect to home office expenses. Most times people don’t bother to take actual measurements to determine the percentage of the home used for business purposes. Often people just “eyeball it” or inflate the actual square footage (or percentage) or they arrive at the figure using absurd logic.
I once had a client claim their entire basement (half of the square footage of his house) when its only business use was to store about a dozen banker’s boxes of old files. The CRA auditors see through this during an audit and unless the taxpayer can support their claim, they can expect the auditor to deny expenses.
To satisfy the auditor, one needs to show their actual expenses (e.g., property tax bills, mortgage statements and electricity bills), plus demonstrate the percentage of the home being used for business purposes. Not a crazy percentage, but the real percentage. And in case taxpayers move and are not able to show their home office to the auditor, it is important to document the home office with photos and floor plans.
Since you are working from home anyway, you might as well take advantage of your options. Claim everything you possibly can (and should) and if you are an employee, get a T2200 form in order to be eligible to claim deductions. Regardless who you are, be well organized and keep all your backup documents in case you are ever audited. While taxpayers are only typically audited up to three or four years in the past, you must keep your records for six years from the end of the calendar year to which the documents relate.
And in the worst-case scenario where an auditor denies some or all of your expenses, you have 90 days from the date of reassessment to challenge the outcome of the audit.
Dale Barrett is the managing partner of Barrett Tax Law, founder of Lawyers & Lattes Legal Cafe, author of Tax Survival for Canadians and the editor of the Family Law and Tax Handbook. He is also a frequent tax lecturer, primarily for accountants.
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