One of the few silver linings of the pandemic is that an unprecedented number of people are enjoying the luxury of working from home. As a result, a correspondingly unprecedented number of people will deduct home office expenses when filing their 2020 income tax returns. The federal government anticipated this inevitable flood of home office expense deductions, so it promised in the Fall Economic Statement 2020 to temporarily streamline the method of claiming the deduction. These temporary procedures will simplify the process for employed individuals, their employers, and presumably the CRA. The details of this simplified process are now available, and this article will tell you what you need to know.
Note that this article discusses the deduction of home office expenses for employees; expenses incurred by self-employed taxpayers who earn business income are subject to different rules. The government has not expressed any intent to modify the process for self-employed individuals.
It is also important to recognize that the rules are vastly different for deducting home office expenses as an employee under normal circumstances; this discussion is for 2020 only. Ordinarily, deducting home office expenses requires meeting the conditions under subsection 8(13) of the Income Tax Act, obtaining a signed Form T2200 from your employer, tracking your eligible expenses, calculating the deductible portion of those expenses that relate to your work space, and completing Form T777 with your tax return.
The CRA is permitting two temporary methods of deducting home office expenses in 2020: the temporary flat-rate method and the detailed method. Using either method, you must complete the new Form T777S, Statement of Employment Expenses for Working at Home Due to COVID-19, and you must include the completed copy with your 2020 tax return. However, if you are deducting other types of employment expenses (e.g., motor vehicle costs), do not follow this new process; instead, follow the existing process by obtaining a T2200 and completing Form T777.
Temporary Flat-Rate Method
The temporary flat-rate method can be used if you worked more than 50% of the time at home for at least one month in 2020 due to COVID-19 or because your employer required you to work from home. If this is the case, you can deduct $2 per day that you worked from home in 2020, up to a maximum of $400 for the year (i.e., up to 200 workdays). Each day that you worked from home on a full-time, part-time or overtime basis counts towards this total, but days off, vacation days, sick leave days, and other leaves or absences do not count.
To claim using the temporary flat-rate method, complete Option 1 on Form T777S and deduct the resulting amount on line 22900 of your tax return. The paperwork is basically non-existent when using this method. You do not need to obtain a signed T2200 or T2200S from your employer. There is no requirement to provide detailed tracking of expenses or to prove that eligible expenses were incurred; you can simply deduct $2 per day! The obvious disadvantage of this method is that you cannot claim a larger deduction if your total eligible expenses exceeds $400. If this is the case, you may consider deducting using the detailed method instead.
Deducting home office expenses under the detailed method resembles the process that would be used under non-pandemic circumstances. To deduct under the detailed method you must meet certain criteria, you can only deduct an employment-use portion of eligible expenses, you must obtain a signed copy of the new Form T2200S from your employer, and you must complete Option 2 on Form T777S.
Detailed Method: Qualifying for the Deduction
To qualify for a deduction under the detailed method, you must have worked more than 50% of the time at home for at least one month in 2020 due to COVID-19 or your employer must have required you to work from home. You must also ask your employer for a completed and signed copy of new Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19; the form can be signed electronically for 2020 only. You are not required to attach the signed copy of Form T2200S to your tax return, but you should retain it in case the CRA asks for it later. It is also required that you keep records of the eligible expenses that you claim.
Detailed Method: Eligible Expenses
Certain types of expenses can be deducted but other kinds are prohibited. The expenses must be used directly in your work during the period. CRA Form T777S conveniently lists what expenses are eligible and ineligible. Eligible expenses include:
- rent paid for a house or apartment where you live (but no imputed rent for a home that you own);
- electricity, water, heat, or the utilities portion of your condominium fees;
- maintenance (minor repairs, cleaning supplies, light bulbs, paint, etc.);
- reasonable internet access fees (excluding connection fees and the cost of leasing a modem and/or router);
- office supplies (stationery items, pens, folders, sticky notes, postage, toner, ink cartridges, etc.);
- employment use of a basic cell phone service plan;
- long distance calls for employment purposes.
Employees who earn commission income can also deduct the following:
- property taxes;
- home insurance;
- lease costs of a cell phone, computer, laptop, tablet, fax machine, etc. that reasonably relate to earning commission income.
However, you cannot deduct any of the following:
- capital cost allowance (which you typically would not be claiming anyway to preserve your entitlement to the principal residence exemption);
- mortgage interest;
- principal mortgage payments;
- capital expenses (replacing windows, flooring, furnace, etc.);
- office equipment (printer, fax machine, briefcase, laptop case or bag, calculator, etc.);
- monthly basic rate for a landline telephone;
- cell phone connection or license fees;
- purchase of a cell phone, computer, laptop, tablet, fax machine, etc.;
- computer accessories (monitor, mouse, keyboard, headset, microphone, speakers, webcam, router, etc.);
- other electronics (television, smart speaker, voice assistant, etc.);
- furniture (desk, chair, etc.).
You cannot deduct any expenses that were or will be reimbursed by your employer. Additional examples of eligible expenses are found at https://www.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/expenses-can-claim.html.
Detailed Method: Making the Deduction
You can only deduct the employment-use portion of your eligible costs that are listed above. The employment-use portion is based on the area of your work space and the hours per week that you use the space for work. First, you should calculate the percentage of your home that you use as a work space:
(area of work space ÷ total area of home) x 100 = your work space as a percentage of your home’s total area
Second, you must calculate your employment use percentage. If your work space is an area that has other purposes besides your work, it is a “common (shared) area”. Your claim for a common (shared) area must be prorated based on the hours per week that you use the area for work:
(hours worked per week ÷ 168 hours per week) x 100 = percentage of time you can claim for the work space
However, if your work space is used solely for your work, it is a “designated room”. Since a designated room is used exclusively for work, your time percentage is effectively 100%.
Last, you should multiply the work space area percentage by the work space time percentage, and then multiply the product by 100. This amount represents the percentage of your home that is used as a work space. Multiply this percentage by your total eligible expenses to obtain your employment-use amount.
However, it may be inappropriate to prorate certain costs. For example, office supplies and the employment use of a cell phone should be fully deductible. According to Guide T4044, if maintenance costs relate solely to the work space, you can deduct the full cost. Conversely, you cannot deduct any portion of maintenance costs relating to a different part of the home—a bathroom, for example.
Once you have ascertained your total deductible work-from-home expenses, the amount is deducted from your income on line 22900. However, the deduction cannot exceed your income from employment that is found in box 14 of your T4. If your deductible expenses exceed your employment income (minus any deductions for your registered pension plan and union or professional dues), the remainder is carried forward and can be deducted in a future year.
Québec Harmonized with Federal Rules
Revenu Québec announced on December 16, 2020 that the province will harmonize the deduction for home office expenses with the temporary federal procedures. As a result, Québec taxpayers can similarly choose between deducting $2 per day under a flat-rate method or use a detailed method that requires tracking expenditures and obtaining Form TP-64.3 from the employer. Revenu Québec is also launching an online service in early 2021 that will allow employers to produce large quantities of forms to their employees. This service will be helpful to larger employers who must provide forms to their numerous employees who are working from home.
Which Method Should I Use?
The total amount of your deductible home office expenses will have a significant influence on determining which method to use. If your deductible expenses are $400 or less, the temporary flat-rate method may be the clear choice, depending on how many days you worked from home. The detailed method is a logical choice if you have deductible expenses in excess of $400. The detailed method requires you to obtain a T2200S from your employer. You must also meticulously track expenses, calculate the employment-use portion, and fill out numerous lines on Form T777S. Therefore, if the deduction is only slightly higher than what is allowed under the flat-rate method, you may simply prefer to deduct $2 per day and save yourself from the additional paperwork.