Calculate Home Business Tax Deductions in Canada

Is your home business eligible for the Home Office Tax Deduction?

Canadian home-based business owners may be eligible to deduct certain business expenses from their income tax. Although there are income tax deductions that are specific to home businesses, not all home businesses qualify.

The Canada Revenue Agency (CRA) has stringent conditions that determine whether a home business owner can claim business-use-of-home expenses⁠—the home office tax deduction. To calculate your business-use-of-home expenses, complete the "Calculation of Business-Use-of-Home Expenses" section on Form T2125, Part 7.

 Note that the expenses you claim cannot have been claimed elsewhere on the 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 a workspace in your home solely to earn your business income and use it regularly to meet with clients, customers, or patients. Therefore, 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 1,800 = 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. If you rent your residence, you can claim a portion of the rent you pay. 

Example of a Home Office Expense Calculation

ExpenseAmount
Unused portion of expenses from previous year 
% of home personal use (1,700/1,800 * 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
Deductible business use portion (Total * 5%)$1,100

In this example, the expenses total $22,000 for the fiscal year. Then, 5%⁠—the allowable portion of business-use-of-home expenses⁠—of $22,000, which are 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 multiply the result by the business portion of your total home expenses.

Using the same example, and operating the business from 9 a.m. to 5 p.m., five days a week, seven hours a day, the business is operating for 35 hours a week out of a total 168 weekly hours. 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 income that does not exist. 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.

Conclusion

When it comes to income tax, every deduction helps. Whether you do your own taxes or send them to an accountant, as a home business owner, you should be well-informed of what business expenses can be deducted from your income tax. Look into whether you meet the CRA's definition of business-use-of-home to claim the home-based business tax deduction on your income tax return.