By now, you’ve likely heard about the special rules for claiming home office expenses in 2020 for employees working from home due to Covid. For 2020, there are two options: the old method, now known as the “detailed method,” and the new, simplified method. But which method should an employee choose?
Under 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 a completed and signed Form T2200S (or Form T2200) from their employer. Equivalent forms must be used for Quebec tax purposes.
If an employee chooses the detailed method, they’re able to deduct a variety of expenses, such as 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., if those costs reasonably relate to earning commission income. Of note, 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.
Where there’s a mixed personal and work element to an expense, the employee can only claim the portion of the expense that can be reasonably allocated to employment use. For utilities, rent and other expenses, the employee needs to allocate the expenses on a “reasonable basis,” which is typically done by taking the area of the work space, 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 prorated for the time spent working.
Temporary flat-rate method
Alternatively, the new 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 simply claims $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.
If 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.
The benefits of using the flat-rate method are that the employee does 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?
At first glance, $2 per day may seem like a pretty small amount to claim as a home office expense, but for employees who own their home rather than rent, it’s likely the best option.
To illustrate, Adam is a homeowner who has been working from home since March 16, 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 work space 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.