New guidance on claiming home office deductions during COVID

In an effort to provide support for individuals and businesses affected by COVID-19, the federal government continues to refine and revise the programs available to Canadians. One of the recent updates relates to home office expenses.

Back in May, we explored the original guidance on claiming home office deductions during COVID-19. In that summary, we took a look at the required conditions for claiming deductions, the type of expenses considered deductible and the tax treatment of reimbursements to employees for certain types of equipment required for work purposes. Here we explore some additional guidance based on recent announcements from the federal government.

Employer reimbursements for home office equipment

The previously announced $500 tax-free reimbursement available to employees for the purchase of computer equipment has been extended to include the purchase of home office equipment, including desks and chairs. Therefore, if an employer reimburses an employee for the purchase of computer or office equipment for their home office, amounts up to $500 will be tax-free. Any amount exceeding $500 will be taxable to the employee.

Home office expenses

Under certain conditions, an employee is allowed to deduct certain expenses associated with a home office. Prior to the pandemic, one essential condition was that the employee must have been required to work from home under a contract of employment. Amid the recent spread of COVID-19, the CRA has simplified the process and requirements to allow employees to deduct home office expenses. For 2020 only, employees can choose to deduct home office expenses under the Temporary Flat Rate Method or the Detailed Method.

Temporary Flat Rate Method

In November’s Fall Economic Statement, the federal government introduced a simplified home office expense deduction. Since then, the CRA has released additional details, granting employees a deduction of $2/day for up to 200 days, provided the employee worked from home at least 50% of the time for at least four consecutive weeks in 2020 due to the pandemic. Only days actually worked from home count, meaning sick days, vacation days and other days on leave do not count. This simplified deduction will allow employees with modest expenses to claim up to $400 in 2020 only, without the need to track expenses or provide an employer-certified T2200 form. Employees who choose this method would not be allowed to claim any other employment expenses (e.g. use of a motor vehicle).

Detailed Method

Employees with higher expenses will likely prefer to file under the Detailed Method, which will require them to track expenses and receive from their employer a signed T2200S form, Declaration of Conditions of Employment for Working at Home Due to COVID-19, which is a shortened version of the T2200 and is new for 2020 only. The CRA has stated that it will accept an electronic signature on the T2200S and T2200 (the T2200 would still be used by employees claiming employment expenses other than home office).

For employees who decide to obtain a completed T2200S from their employer, the types of expenses that are deductible depend on whether the employee earns commission or not. Non-commissioned employees are permitted to deduct the costs of consumable items, including cleaning materials, maintenance, rent, electricity and heating costs. Employees earning commission may also claim property taxes and home insurance costs. However, as mentioned in our previous tax alert, employees can only deduct the proportion of these costs that pertains to their home workspace.

The CRA has expanded the list of expenses that can be deducted. For example, reasonable home internet access fees are considered deductible. A list of the expenses that are considered deductible can be found on the CRA’s website.  

Once your tax return is filed, the CRA often reviews employment expense claims, either through their pre-assessment or post-assessment reviews. Usually, the critical factor for reassessments is the lack of or insufficient documentation to support the expenses claimed. Although the CRA is unlikely to review home office expenses claimed under the Temporary Flat Rate Method, they are likely to continue to scrutinize expenses claimed under the Detailed Method.

For many, gone are the days when every receipt was kept. Many people now rely on their monthly credit card statements or online bank statements to support their expenses. The CRA, however, is reluctant to accept these sources to support a claim for costs. Their position is that credit card or bank statements do not provide the full details. These statements confirm the amount paid, the date paid and, usually, the supplier. They do not, however, provide specifics of the services or items purchased that can be connected to the expenses incurred to earn your employment income.  

The CRA’s position is likely justified in isolated cases. Take, for instance, a past example where an employee deducting fuel expenses with only a credit card statement to support the expense. When investigated further, it was uncovered that the purchases were not only for fuel but also for cigarettes. As such, the CRA is firm in its position that unless you can provide evidence of what was purchased in the form of a receipt, they may deny the entire claim.

Contact us if you have questions related to home office expenses and deductions.