The Canada Revenue Agency (CRA) released guidelines in December that make it easier for employees who’ve been working from home as a result of Covid-19 to claim home office expenses on their 2020 personal tax returns.
The agency introduced two methods for claiming home office expenses for 2020: the new, temporary flat-rate method and the detailed method. Both methods apply to employees who worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 due to Covid-19.
Which method is right for you and your clients? The answer may depend on whether the employee is a homeowner or a renter.
Under the Income Tax Act, an employee who’s required to pay for employment expenses for which they are not reimbursed may be able to claim a deduction on their return. This includes home office expenses. For a valid claim, the employee must generally obtain from their employer a properly completed and signed Form T2200 Declaration of Conditions of Employment.
In December, the CRA introduced a shorter version — Form T2200S — that employers can use for employees who worked from home in 2020 due to Covid-19 and who choose to use the “detailed method.”
Under the temporary flat-rate method, employees simply claim $2 for each day worked from home up to a maximum of $400 (i.e., $2/day for up to 200 working days).
Employees who use the flat-rate method don’t have to keep supporting documents tracking expenses or allocating expenses between employment and personal use, and they don’t need a signed Form T2200S from their employer.
Employees who choose the detailed method using the new Form T2200S are able to deduct a variety of expenses such as the cost of rent, electricity, heating, home internet and water, as well as maintenance and minor repair costs.
Commissioned employees can also deduct home insurance, property taxes and leasing costs associated with a cellphone, computer, laptop, tablet, fax machine and other equipment that reasonably relates to earning commission income.
However, no employees can deduct mortgage interest, or capital expenses or depreciation (capital cost allowance). Further, furniture and equipment such as that new ergonomic chair, widescreen monitor and headset can’t be expensed.
Where there’s a mixed personal and work use for an expense, employees can only claim the portion of the expense that can be reasonably allocated to employment use. For utilities, rent and other expenses, employees need to allocate the expenses on a “reasonable basis.” This is typically done by taking the area of your work space divided by the total finished area (including hallways, bathrooms, kitchens, etc.) of your home.
Which method should clients choose?
While $2 per day may seem like a small amount to claim as a home office expense, it’s likely quite generous (and simpler) than using pro-rated expenses for employees who own their home rather than rent.
For example, say Jack is a homeowner who has been working from home since March 16, 2020. He works in his kitchen, which accounts for 20% of the total square footage of his house. Since his kitchen is not used only for work, he must also consider the percentage of the employment use of the space.
Jack works 42 out of a total 168 hours in the week, or 25% of the time, so his percentage of the home that is considered to be used as a work space is 5% (25% × 20%). If Jack paid $500 monthly for utilities (home internet, electricity, heat and water) for 9.5 months in 2020, his employment portion would be $238 ($500 × 9.5 × 5%). Jack would be better off claiming $2 per day for 200 days, or $400, with no need to track receipts or to obtain a signed T2200 from his employer.
Contrast that to Jill, who has also been working from home since March 16, 2020. Jill is a renter who pays $2,850 monthly for a two-bedroom condo in Toronto, and spends an additional $150 on home internet and electricity.
She works in her second bedroom, which occupies 25% of her condo’s total square footage. As this room is used exclusively for working from home, Jill’s claim is not altered by the time the room is used personally.
Her deduction for 2020 would be $7,125 ($3,000 × 9.5 months × 25%) under the detailed method. That’s worth the effort of obtaining a signed T2200S from her employer.
Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at CIBC Private Wealth Management in Toronto