Working from home? Consider all your available deductions

Many Canadians now work out of their homes and if you’re among this rapidly increasing section of the population, you may be able to deduct a portion of your home office expenses. There are, however, specific rules that must be followed.

If you’re self-employed, the home office expenses that you can deduct must relate to a workspace that is either your “principal” place of business—where “principal” is generally interpreted as more than 50% of the time—or be used exclusively for the purpose of earning income from the business. For the latter to apply, the space must also be used on a regular and continuous basis for meeting clients, customers or patients.

You can deduct a portion of the operating costs of your home if you qualify to claim home office expenses. For example, if your home office takes up 10% of the total square footage of your home, you can claim as a deduction from your business income 10% of your mortgage interest (not principal), property taxes, heat, hydro, water, home insurance and maintenance costs. Any expenses directly related to the home office can be deducted in full.

You should note that home office expenses can only be deducted from the business carried on in the home and cannot be used to create a business loss. Eligible expenses you’re unable to use in the year that they’re incurred can be carried forward to subsequent years and deducted from income generated by the business at that time, as long as the business use criteria discussed above are still met.

There are a different set of rules that apply to employees that wish to deduct home office expenses. Generally speaking, the ability to deduct these expenses is more restricted.

Tax Tip

It’s not a good idea to claim depreciation on the portion of your home used for business purposes, since there may be negative tax implications if you ever sell your home. If you do not claim depreciation, your entire house may be regarded as your principal residence. This way, any gain realized on the eventual sale of your house may be tax-free.

It’s important to keep a well-organized file of all receipts and records of payments—and then go over them with your tax adviser to see if they’re eligible deductions for your at-home business.