The Covid pandemic saw millions of Canadians moving to working from home. Along with those who were already treating their homes as their offices, this shift has dramatically changed the way people do business day-to-day and while some have returned to the office, things have undoubtedly changed forever. While those who worked from home before Covid will be asked to treat their expenses and deductions the same way as before, there are special rules and allowances available within your 2020 tax return for those who started working from home for the first time, or due to Covid-19. If you are one of those affected and/or if you employ anyone who continues to work from home, we have provided a summary of the programs to help you determine what is best for your specific situation.
For employees resident in Canada, home office expenses can be deducted on your tax return provided the employee works from home more than 50% of the time, and the costs are incurred by the employee with no reimbursement from the employer. Business portion costs such as electricity, heating, supplies, and maintenance are exampled of the eligible expenses to be claimed for the business-use-of-home. At the bottom of this article, we list eligible and non-eligible expenses.
Before Covid-19, a deduction would be calculated on Form T777 based on the relative square footage of the office and working area compared to the whole home (prorated for working hours out of total hours), then applying this business-use allocation to total eligible home expenses. The calculated amount is added to actual office expenses for ink cartridges, pens, paper etc. to arrive at a total employment expense to be deducted on the tax return. The employee is also required to have their employer sign in the employment contract that they require the use of a home office and the employer annually signs the T2200: Declaration of Conditions of Employment form.
Fortunately, due to Covid-19 the federal government has simplified the process by allowing a “Flat-Rate Method” or a simplified T2200s, in which eligible expenses can be included on page 2 of the new T777s (to be used for 2020, and possibly 2021).
Flat-Rate Method or a Simplified T2200
A decision was taken that for employees who would normally work in an office, but who have been affected by Covid and work out of a home office, a simplified home office expense deduction of up to $400 would be allowed. To be eligible for the flat rate method, you needed to work at least 50% of the time from home for a period of at least 4 consecutive weeks in 2020, without being reimbursed by your employer for all of your home office expenses. The Flat-Rate method allows the employee to skip figuring out the size of your office relative to your home and prorating for working hours, and instead compute a simple $2/day (max 200 days) write-off. There is no requirement to keep receipts or expense tracking. Most tax return software allows for this calculation directly in the software. If you are paper filing, you can complete the first box on Form T777s.
The new form T777s has a list of eligible expenses on page 1, with a calculation of business-use-of-home expense deduction on page 2. The calculation follows the standard T777, where the square footage of your business work-space is compared against total square footage of home, and working hours out of total hours (example of calculation is included on page 2). This allocation is added to offices supplies (receipts should be kept in the event the CRA requests to review).
Home Office Equipment
Capital expenditures (Computers, Furniture) are not allowed to be deducted by employees for office expenditures. In a normal year, any reimbursement for such items would be considered a taxable benefit to the employee. For 2020, the CRA will not consider an employee to receive a taxable benefit where their employer pays for or reimburses up to $500 of computer or home office equipment to enable the employee to carry out their employment duties, provided the employee submits receipts to the employer.
It is important to note that the $500 reimbursement amount is in respect of each employee rather than each piece of computer or office equipment that an employee may purchase. For example, if an employee purchases a computer for $400 and an office chair for $250, an employer can reimburse the employee up to $500 without the employee receiving a taxable benefit under the administrative position. By contrast, if the employer reimburses the employee the full amount for these purchases, the amount over $500 (that is, $150) must be included in the employee’s income.
The $500 payment is tax deductible for the Employer.
Eligible expenses include:
- rent paid for a house or apartment where you live
- electricity, heat, water or the utilities portion of your condominium fees
- home internet access fees
- maintenance (minor repairs, cleaning supplies, light bulbs, paint, etc.)
- supplies (stationery items, pens, folders, sticky notes, postage, toner, ink cartridge, etc.)
- employment use of a basic cell phone service plan
- long distance calls for employment purposes
If you are a commission employee, you can also claim expenses that reasonably relate to earning commission income for the following:
- property taxes
- home insurance
- lease of a cell phone, computer, laptop, tablet, fax machine, etc.
Non-eligible expenses include:
- capital cost allowance
- mortgage interest
- principal mortgage payments
- home internet connection fees or the portion of fees related to the lease of a modem/router
- capital expenses (replacing windows, flooring, furnace, etc.)
- office equipment (printer, fax machine, briefcase, laptop case, or bag, calculator, etc.)
- monthly basic rate for a landline telephone
- cell phone connection, or license fees
- purchase of a cell phone, computer, laptop, tablet, fax machine, etc.
- computer accessories, (monitor, mouse, keyboard headset, microphone, speakers, webcam, router, etc.)
- other electronics (television, smart speaker, voice assistant, etc.)
- furniture (desk, chair, etc.)
These changes are likely to have long term impacts on the way that taxes are filed in Canada, but since things are still up in the air it is highly recommend that both employers and employees keep all receipts, documentation and other proof of expenses in case there are further alterations to the tax code.