How should customers claim home office expenses this tax season?
by Thomas Hanes on Mar 10, 2021
Give your clients a choice between a 'detailed method' and a new simplified 'temporary flat-rate method.'
You may have heard about the specific practices for claiming home office expenses in 2020 for employees working from home due to Covid in Canada. For 2020, there are two options: the old method, now known as the “detailed method,” and the new, reduced method. But which method should your clients choose?
Using the 'detailed method', an employee must have worked from home more than 50% of the time for a period of at least four consecutive weeks in 2020, and have completed and signed Form T2200S (or Form T2200) from their employer. Equivalent forms must be used for the 'Quebec tax purposes.
If employees decide to use the 'detailed method,' they can deduct a variety of expenses. These include the cost of rent, electricity, heating, home internet, and water, as well as maintenance and minor repair costs.
Commissioned employees can also deduct home insurance, property taxes, and leasing costs associated with a cell phone, computer, laptop, tablet, fax machine, etc. But, only if one can provide evidence that those costs relate to earning commission income. However, employees using the detailed method cannot deduct mortgage interest, capital expenses, or depreciation (capital cost allowance), meaning they can’t deduct that new ergonomic chair, widescreen monitor, or headset, etc. Also, if there’s a mixed personal and work portion to an expense, the employee can only claim the portion of the expense that can be proven to be for employment use.
For utilities, rent, and other expenses, the client needs to allocate the expenses on a “reasonable basis,” which basically means that you take the area of the workspace, divided by the total finished area (including hallways, bathrooms, kitchens, etc.) of the home. If the workspace is also used for other purposes, such as a dining room table that is also used for meals, then the expenses must be further divided for the time spent working.
Temporary flat-rate method
Alternatively, the new 'Temporary Flat-rate Method' may be beneficial if the employee worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 due to Covid. Under this method, the employee may simply claim $2 for each day they worked from home, up to a maximum of $400 (i.e. $2/day for up to 200 working days) per individual.
However, in the case that more than one family member worked from home in 2020, each individual working from home can use the temporary flat-rate method to calculate their deduction for home office expenses and make a separate claim for up to $400.
This new method has the benefit of allowing the employee to not have to track and keep any supporting documents for their expenses, nor do they have to allocate any expense between employment and personal use. Employees don’t need a signed T2200 or T2200S form from their employer, but they do need to include form T777S Statement of Employment Expenses for Working at Home Due to Covid-19 with their tax returns. An equivalent form must be used for Quebec tax purposes.
Which method to choose?
When first considering the new Temporary Flat-rate Method, $2 per day seems a pretty small amount to claim as a home office expense. Still, for employees who own their homes rather than rent, it’s likely the best option.
To illustrate, Alex is a homeowner who's been working from home since March 2020. He works at his kitchen table, which accounts for 20% of the total square footage of his house. Since his kitchen is not used only for work, he must consider the amount of time he uses his kitchen to do his job. As he works 42 hours per week out of a total 168 hours, or 25% of the time, his percentage of the home that is considered to be used as a workspace is 5% (i.e., 25% x 20%). If he paid $500 monthly for utilities (home internet, electricity, heat, and water) for 9.5 months in 2020, his employment portion would be $238 (i.e., $500 x 9.5 x 5%). Adam would be better off claiming $2/day for (around) 200 days, or $400, with no need to track receipts or obtain a signed T2200 from his employer.
More than ever, we need to remain informed and responsible in our personal and business activities through this unprecedented time.
By the way, TLH Benefits Advisors prepares tax returns for individuals and sole-proprietors. Contact us by email: firstname.lastname@example.org
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