With millions of employees continuing to work from home as a result of the Covid-19 pandemic, the ability to deduct various home-office expenses from income will, once again, be top of mind this tax-filing season.
Under the Income Tax Act, employees who are required to pay for employment expenses that are not reimbursed by their employers, including those for a home office, may be able to claim a deduction for such expenses on their returns. For a valid claim, employees traditionally had to obtain from their employers a properly completed and signed Canada Revenue Agency (CRA) Form T2200 Declaration of Conditions of Employment.
In 2020 the federal government outlined simplified procedures for claiming home-office expenses for employees who were required to work from home due to Covid-19. These simplified procedures were recently extended to apply for the 2021 and 2022 years as well.
Requirements to claim home-office expenses
To be entitled to deduct home-office expenses, an employee must be “required by the contract of employment” to maintain such an office, as certified by the employer on form T2200. The CRA has confirmed that, for 2020, 2021 and 2022, the requirement to maintain a home office need not be part of the contract of employment, and it will be sufficient if there is a verbal or written agreement. It will also be sufficient if the employee worked from home because of the Covid-19 pandemic, including the situation where the employee was provided with a choice to work from home.
Traditionally, the home workspace must be either where the employee “principally” (more than 50% of the time) performs their duties of employment or be used exclusively to meet customers on a regular and continuous basis in the course of employment. The CRA has clarified that this first condition will be satisfied in 2020, 2021 and 2022 if an employee worked more than 50% of the time from home for at least four consecutive weeks.
For the 2020 to 2022 tax years, the CRA is allowing employees to choose either the temporary flat rate method or the detailed method to calculate and claim home-office expenses. Let’s review each one.
Temporary flat rate method
If the temporary flat rate method is chosen, employees won’t need to track expenses, or allocate some expenses between work and personal use. Instead, they can simply claim $2 for each day they worked from home due to the Covid-19 pandemic, up to a maximum of $500 (for 250 working days; up from $400 in 2020), per individual. Multiple people working from the same home can each make a claim.
All days worked from home, either full time or part time, count. Vacation days, sick days or any other days that an employee is on a leave of absence do not.
Employees need to complete CRA Form T777S Statement of Employment Expenses for Working at Home Due to Covid-19, and attach the form to their income tax returns. Employees will not be required to obtain a CRA Form T2200 from their employers when the temporary flat rate method is used.
Note that this method cannot be used if the employee is claiming any other employment expenses, such as automobile expenses. Instead, these employees should use the detailed method.
Detailed method
If the detailed method is chosen, an employee must calculate all expenses that are eligible for the home-office expense deduction. Where there’s a mixed personal and work element to an expense, the employee may claim only the portion of the expense that can be reasonably allocated to employment use. Employees who worked from home for only part of the year can only claim expenses paid for the part of the year that they worked from home at least 50% of the time for at least four consecutive weeks.
To claim home-office expenses under the detailed method, employees will be required to complete either CRA Form T777 or T777S, and file it with their income tax returns. The employee must also obtain a signed Form T2200S Declaration of Conditions of Employment for Working at Home Due to Covid-19 from their employer. This form is shorter and requires less information than the T2200 form that was required in previous years. The employee is not required to attach this form to their tax return, but must keep it in case the CRA asks to review it.
Employees choosing the detailed method will be able to claim a variety of expenses, such as the cost of utilities, rent, maintenance and minor repairs, but can’t deduct mortgage interest, property taxes, home insurance, capital expenses or depreciation (capital cost allowance). That means the cost of a new ergonomic office chair won’t be deductible, nor would the cost of a large widescreen monitor, both of which would be considered capital expenses. The CRA is now, however, permitting home internet access fees to be deducted (but not internet connection fees or leasing costs associated with a modem or router). The cost of many office supplies, such as envelopes, paper, pens and sticky notes, is also deductible.
For utilities, rent and other expenses, employees need to allocate the expenses on a “reasonable basis” to determine the portion related to employment use. This is typically done by taking the area of the workspace divided by the total finished area (including hallways, bathrooms, kitchens, etc.) of the home. The CRA has an online calculator that can be used by employees to determine the appropriate claim for home-office expenses.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.