Covid-19 changed everything, including changes to taxes for the 2020 tax year. Now that Canada Revenue Agency (CRA) is offering a small Work-From-Home (WFH) deduction for salaried people, self-employed Canadians have questions.
Specifically, people who have always deducted business-use-of-home (BUH) as part of self-employment and who also have salaried (T4) jobs they did from home in 2020 are confused about what they can deduct.
Executive Summary: self-employed people with business-use-of-home expenses should claim them as usual, and NOT claim the amounts allowed to salaried people, even if they themselves also had salaried income in the year.
There are two main reasons for this position:
- Claiming home workspace expenses for both salaried work and self-employment would be double-dipping; and
- Given that you must choose only one form of the home workspace deduction to claim, the self-employed version is always advantageous.
Double-Dipping Home Workspace Deductions
If you are typically self-employed and usually take a deduction of business-use-of-home as part of your calculation of your taxable income from self-employment, then a portion of your shelter costs are being deducted every year as a business expense.
In essence, you’re deducting a portion of whatever you spend to keep a roof over your head; it’s the portion that relates to the area your workspace takes up.
The Covid-19 special Work-From-Home (WFH) deduction for salaried workers is designed to cover a portion of the same expenses for the same workspace.
What this means is, if you take the BUH deduction as part of your self-employment calculations, and also take the special WFH deduction for the same workspace, you’re actually deducting some of the same expenses twice. That’s a form of double-dipping, which is prohibited.
Self-employed BUH is Always a Bigger Deduction
Consequently, you must choose just one version of business-use-of-home to deduct in order to avoid double-dipping.
We always recommend you choose the self-employment version of BUH for the simple reason that it is always a larger deduction. The Covid-19 version of Work-From-Home deductions for salaried workers can be calculated in one of two different ways, but both allow less than the self-employed version.
Let’s compare some scenarios.
Self-employment BUH deduction
The self-employment version of BUH includes a portion of rent, property tax, mortgage interest, utilities, house insurance and utilities, and you can deduct this amount for the full year. For most of our clients living in urban areas, we find this deduction tends to work out to around $3,000-4,000 per year, or $12-$20 per workday (based on a 5-day work week) for 250 workdays per year.
Covid-19 WFH, simplified calculation version
The most basic, simplified version of the Covid-19 WFH allows for $2 per workday to a maximum of just 200 days, or $400 maximum for 2020.
Covid-19 WFH, detailed calculation version
The detailed version of the Covid-19 WFH (which requires a signed T2200s form from your employer certifying that you needed to work from home in 2020 due to the Covid-19 pandemic), you do a similar calculation to the self-employed version.
However the deduction is still limited to only 200 business days.
For a person renting a home, this calculation would yield $12-20 per workday but only to a maximum of $2,400. That is, very close to the business-use-of-home deduction for self-employed people, but limited to only 200 workdays per year
For a person who owned rather than rented, the picture is actually bleaker. Under the rules of WFH for salaried workers, a number of significant expenses are disallowed, including property tax, mortgage interest, and house insurance.
Consequently, a homeowner would find their deduction using the detailed method of Covid-19 WFH come in at around $3 per workday to a maximum of $600 for 2020.
Tax rules and logic prohibit deduction both the self-employment BUH and salaried WFH for the same workspace. And due to the special limits of salaried WFH and the part-year limits of the Covid-19 version of WFH expenses, in every possible scenario the self-employed version of BUH is the best choice for those who can claim it.