Business Use Of Home Tax Deductions

Peter's picture

We're right in the middle of tax season and what better time to talk about how to reduce your tax burden by operating a business out of your home? By using a portion of your home to run your business, you can start claiming a portion of your household expenses as business expenses. There are a few things you need to be aware of but in general it isn't that difficult to save a decent chunk at tax time.

Do I Qualify?

Before we go any further, we should take a quick look at what constitutes a home office. The Canada Revenue Agency has some strict rules on this subject so it is worthwhile understanding the requirements.

In order for your home office to qualify, at least one of the following must be true:

  • Your home is your principal place of business. This means that you must perform over 50% of your income producing activities from your home. Or ...
  • Your home office is used exclusively for your business and you use it on a "regular and continuous basis for meeting clients, customers or patients."
    • So if you only use your office for doing some paperwork once a week but you spend the rest of the week in an office downtown, then your home office would not qualify.

      What Expenses Can I Claim?

      The Canada Revenue Agency divides home based workers into three different groups:

      • Employees
      • Commissioned Sales Employees
      • Self-Employed Individuals

      Depending on which classification you fit into, there are different deductions permitted. Here is a table showing a rough breakdown:

      Expense Employee Commissioned Sales Self-Employed
      Rent o o o
      Mortgage Interest x x o
      Property Taxes x o o
      Utilities o o o
      Telephone & Internet o o o
      Home Insurance x o o

      In the table above, an "o" indicates that the expense can be deducted and an "x" indicates that it cannot be deducted.

      Of course, you can't deduct your entire electricity bill. In fact, you can't deduct all of any of these expenses. This is because part of these expenses are personal and the personal part is not deductible.

      The most straightforward method for determining what percentage of these expenses is business related is to calculate what percentage of your home's floor space is taken up by your home office. Measure the floor area of your office and divide that number by the total area of your house. In general, you can exclude common areas such as hallways and bathrooms from this calculation.

      Once you've figured out the percentage of your home that is used for your business, you can multiply all applicable household expenses by this number. So, if you've calculated that your office occupies 8% of your home, then you can claim 8% of your gas bill, electricity bill, rent, etc. as business expenses.

      One thing to note is that you can only claim these business-use-of-home expenses against business income. So, if you've got $1000 worth of business related home expenses, but your business only earned $500 for the year, then you can only claim up to $500 on your taxes. However, the remaining $500 not claimed can be carried forward to future years to reduce your taxable income down the road.

      Mind The Books

      As with any financial activities, it is a good idea to keep detailed records justifying these types of tax claims. Here are a few tips:

      • Document how you determined what percentage of your home is used for your business. Keep all the measurements that you used.
      • Keep copies of all your household bills showing the total expenses you incurred.
      • Keep a detailed record of all your business income and non-household business expenses as well.

      At the end of the day, you need to be able to show an auditor exactly what you've done and it needs to be clear.

      You can realize some significant savings on your tax bill if you track everything properly, so it is worth your while to take the time to do things the right way.

      Disclaimer

      If you enjoyed this post you may want to consider subscribing to Plan Your Escape via Email or via RSS feed.



Comments

Actually I loved this post

Actually I loved this post as I will,for the first time,claim part of my household expenses for the business.
My question would be,how do you separate how much is business and how much commission?
As for myself,I am fully comissione (I sell cars) and have a vending machine too which is the business part.

Peter's picture

Well first of all you'd have

Well first of all you'd have to be able to justify that you are using your home to run your business of selling cars. If you operate your business 100% from home then you just need to figure out what percentage of your home is used exclusively for your business. If you've got a home office that takes up 5% of your total home area, then you can claim 5% of the items listed in the table in the article under commissioned sales. If you sell cars from a dealership and work from home some of the time then you'd need to incorporate that into your calculation as well. So if you work from home 40% of the time and at the dealership the rest of the time, then you can only claim 40% of the full deduction.

So the formula would be:
(% of home used exclusively for business) x (% of time spent at home for business) x (Total Home Expenses) = Allowable deduction

I run a private day home and

I run a private day home and I am considering expanding it. I want to add a partner into the business, but I am concerned that this might arouse some concerns when it comes tax time. How do we claim and will I end up owing huge amounts at the end of the year?And will I need to become incorporated?

Very clear and consice

Very clear and consice article explaining the basic concept of how much can be deducted and not just what can be deducted. It's easy to find articles on the web that list expenses that you can deduct but as a self-employed person, I was trying to calculate how much tax I will have to pay versus by how much I could reduce that and this article answered that for me. Both the article and the equation example posted by Peter were very helpful. Thanks!

Whatever I claim as property

Whatever I claim as property tax for business use of my home, can I claim the remainder of the property tax on my husband's income tax? In Ontario.

Peter's picture

Yes, that should be fine.

Yes, that should be fine. I'm assuming your husband is claiming the remaining property tax as part of the Ontario property tax credit.

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • HTML tags will be transformed to conform to HTML standards.

More information about formatting options