# How to Calculate the Home Based Business Tax Deduction in Canada

## Is Your Home Business Eligible for the Home Office Tax Deduction?

If you run a home business, you'll want to be sure you deduct all the relevant home business expenses on your income tax.

However, although there are income tax deductions that are specific to home businesses, not all home businesses will qualify for them. The CRA (Canada Revenue Agency) has stringent conditions that determine whether or not a home business owner can claim business-use-of-home expenses (the home office tax deduction) on line 9945 of the T1 tax form.

### Who Can Claim the Home Based Business Tax Deduction

You can only claim business-use-of-home expenses if your home is your principal place of business, or you use the work space in your home only to earn your business income and use it regularly to meet with clients, customers or patients.

So you can't claim business-use-of-home expenses if you are conducting business somewhere else as well, or because you sometimes work on business matters at home.

### How to Claim the Home Based Business Tax Deduction

It's easiest to calculate if you have a specific room set aside for business purposes, such as a home office. Then it's a simple matter to take the area of your work space and divide it by the total area of your house.

For instance, suppose you have a home office that is 10 x 10 feet in a house that's 1800 square feet. Then your calculation of the allowable portion of business-use-of-home expenses would be: 100 divided by 1800 = 5%. The personal use portion would be = 95%.

The next step in calculating the home business tax deduction is to apply this percentage to your allowable household expenses.

You can deduct a portion of all your house expenses that directly relate to operating your business, such as your utilities, telephone, and cleaning materials.

If you own your home, you can claim a portion of your house insurance, property taxes, and mortgage interest (although you can't claim the mortgage payments themselves.) If you rent your residence, you can claim a portion of the rent you pay.

Example of Home Office Expense Calculations:

 Expense Amount Unused portion of expenses from previous year % of home personal use (1700/1800 * 100) 95% Heat \$1,000 Electricity \$1,000 Home Insurance \$1,000 Maintenance and Repairs \$3,000 Mortgage Interest \$12,000 Property Taxes \$3,000 Phone \$1,000 Other home office expenses (needs description) Total expenses \$22,000 Personal use portion (Total * 95%) \$20,900 Deductable business use portion (Total * 5%) \$1,100

In the above example the expenses total \$22,000 for the fiscal year. Then 5% (the allowable portion of business-use-of-home expenses) of \$22,000 (total home expenses) is \$1,100, which would be the total business-use-of-home expenses claim on line 9945 of the T1 tax form.

Note that Canadian tax software programs will automatically calculate the expense portions based on your personal/business work space ratio.

### Adjusting Work Space in the Home Expenses for Mixed Use

Using the same example used above, and operating the business from 9 a.m. until 5 p.m. five days a week, (7 hours a day), the business is being operated for 35 hours a week out of a total number of hours in a week of 168.

Then the deductible business use claim would be reduced by:

35/168 hours x \$1,100 = \$229.17 - Your total home based business tax deduction

Note that you must have income to make tax deductions from.

You can't deduct an expense from an income you don't have. In other words, you can't use the business-use-of-home expenses to create a business loss, so your deduction can't be more than your net income before you deduct these expenses. If it's more, you can carry the amount of these expenses forward into the next year.

It may not seem like a lot, but when it comes to income tax, every deduction helps. If you run a home business and meet the CRA's definition of business-use-of-home, you'll want to be sure you claim the home based business tax deduction on your income tax.