How to Calculate Home-based Business Tax Deductions in Canada
Is your home business eligible for the Home Office Tax Deduction?
If you run a home business, you can deduct certain home business expenses on your income tax return. However, although there are income tax deductions that are specific to home businesses, not all home businesses will qualify.
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).
To help calculate your business-use-of-home expenses, complete the "Calculation of business-use-of-home expenses" on Form T2125, Part 7. The expenses you claim cannot have been claimed elsewhere on Form T2125.
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 a workspace in your home solely to earn your business income and use it regularly to meet with clients, customers, or patients. That means that you cannot claim business-use-of-home expenses if you are also conducting business elsewhere or because you sometimes work on business matters at home.
How to Claim the Home-based Business Tax Deduction
If you meet the CRA requirements, because you are doing business where you live, your expenses will be a percentage of your home expenses. If you use a specific room for business purposes, such as a home office, you can take the area of your workspace 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 1,800 square feet. Then, 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 cannot claim the mortgage payments themselves.) If you rent your residence, you can claim a portion of the rent you pay.
Example of a Home Office Expense Calculation
|Unused portion of expenses from previous year|
|% of home personal use (1,700/1,800 * 100)||95%|
|Maintenance and repairs||$3,000|
|Other home office expenses (needs description)|
|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 claimed on Form T2125.
Note that Canadian tax software programs will automatically calculate the expense portions based on your personal/business workspace ratio.
Adjusting Work Space in Home Expenses for Mixed Use
If you operate a part-time business out of your home and use the space for both business and personal activities, you must adjust your work-from-home expenses accordingly. For instance, suppose you have a home office that you use to run a consulting business five days a week and for the remainder of the time the office is used for personal activities. To calculate your business-use-of-home expenses, you would calculate how many hours in the day you use the workspace in your home for business purposes, divide that amount by 24 hours, and then multiply the result by the business portion of your total home expenses.
Using the same example as above, and operating the business from 9 am until 5 pm five days a week, (seven hours a day), the business is operating for 35 hours a week out of a total number of hours in a week (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 which you can apply tax deductions. You cannot deduct an expense from an income that you do not have. In other words, you cannot use business-use-of-home expenses to create a business loss. Therefore, your deduction cannot be more than your net income before you deduct these expenses. If the deduction exceeds your net income, you can carry the amount of these expenses forward into the next year.
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, be sure to claim the home-based business tax deduction on your income tax return.