Self-employed people in Canada can take a home office deduction. It’s one of the best things about being self-employed: you can take costs you were already incurring — your residence costs — and use them to reduce your taxes.
The Canada Revenue Agency (CRA) calls the home office deduction business-use-of-home. As a self-employed person 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; OR
- 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
The process of taking a deduction for your home office is simple:
- Add up the cost of keeping a roof over your head
- Determine what fraction of your home is taken up by your workspace
- Use that fraction to calculate a portion of your costs
- Deduct that portion from you self-employment income
Allowable Expenses for the Home Office Deduction
Only some of your expenses can be used in the home office deduction. They include:
- Interest portion of mortgage
- Utilities (heat, electricity, water etc
- Maintenance (including cleaning and repairs)
- Home insurance
- Property Tax
For most self-employed Canadians those can amount to a significant cost right there, but it’s equally important to know what is not eligible for this deduction.
You can NOT use the following expenses:
- Principal portion of mortgage
Principal portion of mortgage: A mortgage is a form of a loan, and every mortgage payment includes two part: the part that actually repays the loan, called the principal, and the interest on the loan. Only the interest can be included in the business-use-of-home calculation.
Renovations: Renovations (not deductible) differ from repairs (deductible as part of maintenance) in that renovations make an improvement to the property beyond its state when you purchased it; repairs only return the property to that state.
So for example if you purchased a home with wooden steps up to the front door, the cost of painting or repairing those steps would be included in maintenance (and would be deductible). But if you improved the property by replacing the wooden stairs with concrete ones, that’s a renovation and it is NOT deductible.
Calculating the Home Office Percentage
Once you have the total of all the allowable expenses for the home work space deduction calculation, it’s time to figure out what percentage of them you can deduct. The percentage depends on how much of your home is taken up by your workspace.
You can calculate this as a percentage of floor space your office takes up. For example, if your office takes up 1/5 of the floor space in your apartment, you can take 20% of the allowable home expenses. Alternatively, if your workspace takes up an entire room, you can take that one room and divide by the total number of rooms in your home. So if you have four rooms and your office takes up one of them, you can take 1/4 or 25% of the allowable home expenses.
The Canada Revenue Agency (CRA) permits you to use either method, so pick the one that gives you the better (bigger) deduction.
Part-time Home Offices and Work Spaces
The home office or work space doesn’t have to take up an entire room, but it does have to be dedicated to work only — or else you’ll have to decrease your percentage.
For example, say you work at your kitchen table during the day, but you have your dinner there at night. In that case you could calculate the floor space your part-time office takes up, say 15% of your home; but then you’d have to take only half of that, because half the time the kitchen table is, well, a kitchen table. So in that case you could only take 7.5% of the total allowable expenses for your home office deduction.
Note: the preceding discussion refers only to business-use-of-home deductions from self-employment income. A form of business-use-of-home deduction is also available to some employees under certain circumstances as an employment expense (in situations where an employee receives a T2200 Conditions of Employment form from their employer). However those kinds of business-use-of-home expenses are subject to different rules. Refer to CRA’s guidance regarding T777 Employment Expenses.