During the COVID-19 pandemic, many employees transitioned to working from home. During the crisis, few were considering the income tax implications. As life returns to whatever the “new normal” is, we can be confident taxes will still exist. So what are the tax implications of a workspace in the home?
Deducting home office expenses
In general, the expenses employees can deduct are very limited. The COVID-19 pandemic has opened up new questions in respect of working from home. The tax community has been pushing for guidance in time for the next tax filing season. However there has been little commentary from the Canada Revenue Agency (CRA) to date, which is understandable given the other priorities during the crisis.
When are expenses deductible?
In order for home office expenses to be deductible against employment income, the employee’s contract must require them to incur such expenses. While the COVID-19 pandemic has required many to work from home, was this required under their contract of employment? The CRA has not commented on this issue to date. They will hopefully acknowledge that, when the only option for working at all was working from home, such a requirement was implicit and does not require revising existing employment contracts. Note that if the employee had the choice of working from home or at the regular workplace, they would not meet this requirement.
Any claim for workspace in home costs must meet one of the following tests:
- The home is where the employee principally (more than 50% of the time) does their work; or
- The employee uses the space exclusively to earn employment income, and on a regular and ongoing basis for meeting clients, customers or other people in the course of performing employment duties.
In order for home office expenses to be deductible against employment income, the employee’s contract must require them to incur such expenses.While working from home during the COVID-19 pandemic, it seems likely that many more workers will meet the requirement under (i) than in previous years. However, it is uncertain whether the workspace must be the main place of work in context of the entire year, or whether meeting this test for a period during the year (such as the weeks or months dictated by preventative COVID-19 measures) is sufficient. While the CRA has not yet commented, hopefully they will provide a reasonable interpretation for this unusual situation before we need to file tax returns.
If working from home for only part of the year means qualifying under provision (ii), the requirement for regular and ongoing meetings becomes more problematic than usual due to social distancing measures and government-required shutdowns. The CRA has historically stated that those meetings must be in person. Tax Court decisions have held differently, accepting telephone calls as well. The advent of videoconferencing adds a third possibility. Perhaps this will be the impetus for CRA to review their position, which many have suggested is outdated.
In addition to meeting these criteria, any such deduction requires the employee to obtain a completed T2200 (Declaration of Conditions of Employment) from their employer. Some large employers whose workforce shifted substantially to remote work during the pandemic have raised concerns regarding the administrative costs of completing this form for hundreds, or even thousands, of employees. While again we hope for CRA guidance, the form is a legislative requirement, which may make CRA uncomfortable waiving it.
What expenses are deductible?
A portion of household costs – such as electricity, heating, water, rent, security and maintenance – would typically be deductible. If the employee is a commissioned salesperson, as opposed to a regular employee, they can also deduct a portion of property tax and insurance costs. No employee (neither commissioned salespersons nor regular employees) can deduct mortgage interest or capital cost allowance on the residence itself.
… CRA recently noted that acquiring computer equipment may be primarily for the employer’s benefit, in the context of the COVID-19 pandemic …When calculating the deductible percentage, a reasonable basis should be used, such as the area of the workspace divided by the total finished area (including hallways, bathrooms, kitchens, etc.). Expenditures that relate solely to the workspace and employment duties do not have to be prorated. For example, an employee who installed a separate phone line exclusively for employment use or incurred long-distance charges for employment-related calls would deduct those costs in their entirety. On the other hand, costs incurred entirely for personal use would be excluded from any deduction claim. For example, few employees would need to pay for cable television or deck repairs in connection with their employment duties. Where the employee used the workspace for only part of the year, a further prorating of relevant costs for time used for employment also becomes relevant. Finally, the claim cannot exceed income earned from the employment, prior to this deduction.
Note that on a review of any claim for these deductions, the CRA will expect supporting documentation. The employee must retain:
- receipts for the various expenses claimed;
- the completed T2200 (Declaration of Conditions of Employment) from the employer; and
- details of the manner in which the personal usage was prorated, based on:
- space (portion of house) used for work;
- daily time (portion of the day used for work); and
- overall time, prorating expenses that do not relate to the portion of the year when working from home.
For more information and copies of the relevant forms, see CRA Guide T4044.
Telecommuting allowances and reimbursements
What if the employer pays the costs incurred for working from home?
In general, all allowances paid to an employee are taxable.Generally, a reimbursement for a personal purchase of equipment used for working remotely would be a taxable benefit for the employee. However, CRA recently noted that acquiring computer equipment may be primarily for the employer’s benefit, in the context of the COVID-19 pandemic and the resulting requirement that many employees work remotely. Accordingly, CRA indicated that they are prepared to accept that such reimbursement would be a non-taxable benefit to the employee. Actual invoices or receipts must support the reimbursement and total no more than $500 towards equipment for an employee. Unfortunately, to date, CRA has not published this French interpretation in a form accessible to the general public. Read the French version online at Video Tax News, a non-government website. Non-accountable allowances would always be taxable, as no provision would provide for an exclusion of such amounts, so once again, receipts are essential.
A portion of household costs – such as electricity, heating, water, rent, security and maintenance – would typically be deductible.CRA did not comment on situations where the equipment was used exclusively for employment and was owned by the employer, not the employee. CRA has indicated in the past that there is no taxable benefit to the employee where equipment is the employer’s property and any personal use is incidental. Of course, this would suggest that the employee return the equipment to the normal workplace after the crisis has passed.
In general, all allowances paid to an employee are taxable. This means that where an employer pays, say, a monthly allowance for the period the employee was required to work from home, this allowance would be treated like the rest of the employee’s compensation – subject to source deductions, T4 reporting and inclusion in income. The provision of such an allowance would at least seem to indicate that the employee was required to work from home, possibly supporting the claim that this is a contractual requirement and opening the door to deductions as described above.
As the immediate crisis passes, the economy returns to some semblance of normalcy and we all struggle to assess what “normal” will mean in the post-pandemic world, assessing the tax implications of that temporary work-from-home arrangement well in advance of tax time next year will allow appropriate documents to be gathered and hopefully result in some tax savings next April.