Home Office Deduction (CRA): Business-Use-of-Home on the T2125

Can I claim a home office if I work alone and never meet clients?

Yes, if the work space is your principal place of business. Meeting clients matters only under the second test, so a freelancer who works alone at home can qualify under the first. You work out the business share of your home costs in Part 7 of Form T2125, and the result goes on line 9945 (Income Tax Act, s. 18(12); CRA guide T4002, chapter 3).

Three things decide whether your case is simple:

• Is this room where the business is mainly run? The CRA's Income Tax Folio on business use of home (its published reading of the law) sets no minimum number of hours. It looks at the facts, as the examples in the next section show.
• Is the room also personal space? Personal use reduces the claim. The hours method below handles it.
• Is the business in profit? Home costs cannot create or increase a loss.

Some cases are not simple, and the rules below do not settle them: you plan to sell the home or have claimed capital cost allowance on it; you share the home or its costs with a partner or co-owner; the CRA gave you conflicting answers in earlier years; or a corporation, not you, runs the business (see business expenses paid personally). Each can change the amount you may claim or the tax on a later sale, so read "Different for you?" at the end before you file.

Gather first: the floor area of the work space and of the whole home, the year's rent or mortgage interest, property tax, insurance, utility and repair bills, and, if the room is shared, the hours it is used for work.

This page covers the federal rule. Quebec residents also file a provincial return, and its rules are not covered here.

What are the two tests, and what does "principal place of business" mean?

A work space in your home is deductible only if it passes one of two tests in section 18(12) of the Income Tax Act. The home must be a self-contained domestic establishment, which the Folio describes as a living unit with restricted access that has a kitchen, bathroom and sleeping facilities. A house, an apartment or a similar unit, such as a condo unit, can qualify if it fits that description.

The Folio looks at the facts, not a percentage of time. A contractor who did the paperwork at home and the jobs at customer sites qualified under test 1. A lawyer who met clients almost only at a rented office did not.

If neither test is met, no part of the home costs is deductible as a work-space cost. A partner applies the same tests to their own home. If the partnership already records or reimburses a cost, the partner cannot claim it again (Form T2125, Part 6).

Which home costs count: rent, property tax, mortgage interest, utilities, insurance, repairs?

The business share of what it costs to live in and run the home counts. Costs that buy or improve the home itself do not. The CRA lists heating, home insurance, electricity, cleaning materials, property taxes, mortgage interest and, if you rent, rent.

Claim each cost once. An amount on line 9945 cannot also be claimed on another line of the T2125. Other expense lines are in self-employed expense lines. Meals, courses and other costs are in business expenses the CRA accepts.

Are condo fees, internet and phone deductible?

Internet and phone are ordinary business expenses, not work-space costs. For condo fees, the part that pays for heat, electricity, water or insurance matches costs the CRA names; the CRA does not say how the rest is treated.

Internet and phone. The Folio says telephone and internet are not subject to the work-space rules and may be deducted as a regular business expense, for the business portion only. Claim them on the ordinary expense lines, not line 9945. The CRA guide is more specific about phones. It does not allow the basic monthly rate of a home telephone. It does allow business long-distance calls made on it, the basic rate of a separate business-only line, and the business share of cellphone airtime.

Condo fees. The Folio and the self-employed pages do not name condo fees, so ask the condo corporation what the fee covers. A part that funds capital repairs, or a one-time special assessment, is a judgment these sources do not settle. For employees, the CRA does name the utilities portion of condo fees (electricity, heat and water) as claimable (CRA).

How do I work out the percentage: by area, and by hours?

Divide the work space's area by the home's total area. If the room is also personal space, scale that share by the hours it is used for work. The CRA asks for a reasonable basis, not one formula.

1. Area share. Work-space area divided by the total finished area of the home. The Folio counts halls, bathrooms and kitchens in the total, and accepts other methods that are reasonable in the circumstances.
2. Apply it. Multiply the year's eligible costs by the area share.
3. Hours, if the room is shared. Add up the hours a day the room is used for the business, divide by 24, and multiply the cost from step 2 by the result (CRA guide T4002).
4. Part-week or part-year use. If the business runs only part of the week or year, reduce the claim to match.
5. GST/HST. If the costs include GST/HST that you claim as an input tax credit, reduce the expense by that credit (CRA guide T4002). See GST/HST input tax credits.

A room that passes test 2 is used for nothing else, so area alone applies. The percentage and the reasons for it belong in your records.

Can the claim be bigger than my business profit?

No. The deduction cannot exceed the business income for the year before this deduction, so it cannot create or increase a loss. The unused part is treated as a work-space cost of the next year (s. 18(12)(b) and (c)).

On the form, Part 7 adds this year's business share, any capital cost allowance and last year's carry-forward. It limits the total to net income after adjustments (amount 5D), and shows what carries forward (Form T2125). For a partner, that amount is after the expenses claimed in Part 6, so those reduce the room for the home claim. The Folio adds three conditions to the carry-forward. It lasts only while one of the two tests keeps being met. It must be used in the earliest later year with business income. It can be used only against income from the same business.

The limit applies to work-space costs only. Other expenses, including internet and phone, can still produce a loss.

I rent or I own: what changes, and is mortgage principal a cost?

A renter claims a reasonable portion of the rent. An owner claims ownership and running costs, but never a rental value for their own space (Folio). Mortgage principal is not a cost.

• Principal. Repaying the loan is a payment on account of capital, which the Act bars unless it expressly permits it (s. 18(1)(b)). Only the interest can count.
• Interest. Interest on money borrowed to buy your home does not generally qualify on its own, but the work-space share of it can be deductible when the work-space tests are met. It must also meet paragraph 20(1)(c), which requires borrowed money used to earn business or property income, so you must trace the borrowed money to its use (Folio). Interest on money used for personal things, such as a vacation, is not deductible.

Should I claim capital cost allowance on my home?

Not by default. Capital cost allowance (CCA) on the business part of your home is optional, and the CRA warns that capital gain and recapture rules apply if you claim it.

The CRA's principal residence Folio says the CRA treats the whole property as a principal residence when all three are true:

• The business use is secondary to living there.
• There is no structural change.
• No CCA is claimed.

A taxpayer with a home work space may still claim the expenses other than CCA. Claiming CCA ends that treatment, and the business part is treated as a partial change in use from when the business use began. Moving back to personal use can also bring recapture of CCA already claimed (Folio paragraphs 2.60 and 2.64). A subsection 45(2) election can, in some cases, defer that deemed sale, but claiming CCA rescinds the election as of the first day of that year (paragraphs 2.48 and 2.62), so it does not let you do both. Whether it fits is a professional question; the election is covered in turning a home into a rental.

The trade is a claim now against exposure on a later sale. CCA is also inside the profit limit above. For the sale itself, see principal residence exemption. For how CCA works, see capital cost allowance.

I also have an employer: does my home office count, and which return?

Both claims go on your personal return, but through different forms with different tests. A business space goes through the T2125. An employment space needs a signed Form T2200 from the employer. It covers only eligible expenses you were required to pay and for which you are neither reimbursed nor entitled to reimbursement (Income Tax Act, s. 8(1)(i)).

Sources: Form T2125; the CRA's employee pages on eligibility, expenses and how to claim.

The CRA pages do not say how to split one room that serves both an employer and your own business. That is a judgment call. If your corporation, not you, runs the business, see business expenses paid personally.

What do I keep if the CRA asks, and do I send anything?

Send the T2125 with your return. Keep the records behind it, and do not send them. The CRA says to keep records for at least six years from the end of the last tax year they relate to (CRA guide T4002, chapter 1). For a return filed late, keep its records for at least six years from the day you file it (Income Tax Act, s. 230(5)). An objection or appeal can require longer.

Keep:

• A floor plan or measurements showing the work space and the home's total finished area.
• The lease, or mortgage interest statement and property tax bill.
• Insurance, utility and repair bills, and the condo fee breakdown.
• For a shared room, a simple record of the hours used for work.
• Each year's carry-forward figure from Part 7, and the bills behind it. The CRA does not say how its retention period applies to a carried-forward amount, so keep them that long after the last year you use it.

The Folio asks that the split be reasonable. It does not prescribe a format. For the full year-end list and how to split mixed-use bills, see what to give your accountant as a sole proprietor.

Two CRA agents told me different things: whose answer holds?

The rule is in section 18(12) and the CRA's published Folio, and a general phone answer is not an advance income tax ruling. When two answers split on whether your space qualifies, the facts decide: how the room is used, how often and for what.

• The CRA says its technical interpretations are not determinative of the tax treatment of a particular taxpayer. It regards an advance income tax ruling, which is a written answer to a written request, as binding on the CRA for the taxpayer who received it, if the proposed transactions go ahead within the stated time (IC70-6R12).
• If wrong information from the CRA led to a penalty or interest, you can ask for relief. The CRA's relief circular lists incorrect information given to a taxpayer among the actions that may justify it. For a verbal answer it asks for the date, time, and name and agent number of the person you spoke to, and what was said. The time limits and how to ask are in penalties, interest and relief.

Note the date, time, agent number and the question and answer on every call.

Example

These examples are illustrative. All figures are in Canadian dollars. Assume each work space is the principal place of business throughout the period shown. The designer and the condo owner each have enough net business income before home costs to claim the calculated amount.

A freelance designer who rents

A designer works alone from a rented flat and never meets clients there. The work space is a 10 m² room used only for work, in an 80 m² flat, so 12.5% of the area. Rent, utilities and home insurance for the year come to C$24,000. The area share is 12.5% of C$24,000, or C$3,000. Assuming the room is her principal place of business, she claims C$3,000 on line 9945. Her internet plan is a separate ordinary expense.

A thin-profit year, then a carry-forward

A consultant's net income before home costs is C$4,000 in year 1, and the business share of her home costs is C$6,000. The claim is limited to C$4,000. Net income is C$0 and C$2,000 carries forward.

In year 2, net income before home costs is C$10,000 and the business share of home costs is C$5,000. Adding the C$2,000 carry-forward gives C$7,000, which is under the C$10,000 limit. She claims C$7,000, net income is C$3,000, and nothing carries forward. If she had stopped meeting both tests in year 2, the Folio's condition for carrying the C$2,000 forward would not be met.

A condo owner with a shared room

A spare room is 10% of the unit. It is a guest room outside work hours, and he works in it 8 hours a day, 5 days a week. Eligible costs for the year are C$18,000, not counting mortgage principal.

• Area share: 10% of C$18,000 is C$1,800.
• Hours: 8 of 24 hours is one third, so C$600.
• Days: 5 of 7 days reduces that to about C$430.

He claims about C$430 on line 9945.

Different for you?

• You have a loss year or thin profit: the claim stops at the profit, and the rest carries forward only while a test is still met. Get individual tax help to work out the amount your facts support.
• You share the home or its costs with a partner or co-owner: the CRA sources do not set out how two people split one home's costs, so this is a judgment to settle before either of you claims. Bring the lease or ownership papers to individual tax help.
• Earlier years were claimed, or skipped, after conflicting CRA answers: whether to amend depends on whether the space qualified in each year. Start with individual tax help. If a letter arrived, see CRA reviews and audits. If the bills and receipts for those years are missing, rebuild the records first: see catching up on overdue books or bookkeeping.
• You plan to sell the home, or you claimed CCA on it: read principal residence exemption first, then get individual tax help before you sell.
• You rent out part of the home, or are turning it into a rental: see turning a home into a rental.
• Your corporation repays you for home costs, or you have a T2200: see business expenses paid personally.
• You are a US citizen or green card holder with a business in Canada: your US return applies its own home-office rules, which differ from the CRA's. See turning a T2125 into Schedule C and the US home office deduction, or get cross-border tax help.
• You paid GST/HST on home costs: see GST/HST input tax credits.
• Your home costs are mixed into personal accounts and nothing reconciles: that is a bookkeeping job before it is a tax question. For how the profit is taxed, see how self-employed income is taxed.