Canadian: business-use-of-home expenses

If you are running a business in Canada, you can deduct expenses for the business use of a work space in your home, as long as you meet one of the following conditions:

• it is your principal place of business
• you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients

You can deduct part of your maintenance costs such as heat, home insurance, electricity, and cleaning materials. You can also deduct part of your property taxes, mortgage interest, and CCA. To calculate the part you can deduct, use a reasonable basis such as the area of the work space divided by the total area of your home.

CRA requires that a reasonable percentage be used to calculate how much of the total home costs may be used to use as a business deduction. The percentage must be based on area of the home, as well as time.

Area of the home used for business-use-of-home can be either based on the area taken up by the home office as a percentage of the total area of the home, or by the number of rooms taken up by the business as a percentage of the total rooms in the house.

For example, Jerry works out of a a spare office in his home. This room makes up to 15% of his total home. The home has a totle of five rooms. Jerry an use either 15% based on the home office area, or 20% (1 room out of 5) as his percentage of business use of home.

Time of use comes into play if the business portion of the home reverts to personal use for part of the day or year. E.g., if the business is run from the dining room table but the room is still used as a dining room outside business hours, the business-use-of-home claim must be prorated to take into account the fact that the dining room is only devoted to business use for part of the day. Similarly, if the business is only run for part of the year, the business-use-of-home claim also needs to be adjusted to take this into account.

The following expenses can be included in the initial calculation of the cost of maintain the home:

• Rent (for business-use-of-home)
• Mortgage interest
• Utilities(heat, electricity and water.）
• Security Systems
• Property tax
• Cleaning services
• Repairs (But not renovations. A renovation is defined as a change that increases the value of the home by bringing it to a better state than it was in when it was purchased. The exception to the ‘no renovations’ rule is expenses you incur for eligible disability-related modifications made to a building in the year. These can be deducted as expenses as part of business-use-of-home.)

The amount you can deduct for business use of home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use home office expenses to increase or create a business loss.

If you end up with having more expenses than income for your home business, you will have what the CRA calls unused workspace in home expenses which you can carry forward into future years.

About author Lina Wang