Canadian home-based business owners may be eligible to deduct certain business expenses from their income tax. While there are income tax deductions that are specific to home-based businesses, not all home-based businesses qualify.
The Canada Revenue Agency (CRA) has strict conditions that determine whether a home-based business owner can claim business expenses for the use of the home: the home office tax deduction home. To calculate your business use of housing expenses, complete the “Calculation of business use of housing 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 your home expenses if your home is your principal place of business, or if you use a workspace in your home solely for business income and use it regularly to meet with clients or patients. Therefore, you cannot claim business use of the home expenses if you also conduct business elsewhere or because you sometimes do business 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 household expenses. If you use a specific room for business purposes, such as a home office, you can take the area of your work space and divide it by the total area of your house.
For example, suppose you have a 10 x 10 foot home office in an 1,800 square foot house. So the allowable portion of the business use of the home would be: 100 divided by 1,800 = 5%. The personal use portion would be = 95%.
The next step in calculating your home business tax deduction is to apply this percentage to your allowable household expenses. You can deduct a portion of all household expenses that are directly related to running your business, such as utilities, telephone, and cleaning supplies.
If you own your home, you can claim a portion of your home insurance, property taxes, and mortgage interest, although you cannot claim your mortgage payments. 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 prior year expenses|
|% home personal use (1,700/1,800 * 100)||95%|
|Maintenance and repairs||$3,000|
|Other home office expenses (need description)|
|Personal use portion (Total * 95%)||$20,900|
|Deductible Business Use Portion (Total * 5%)||$1,100|
In this example, expenses total $22,000 for the fiscal year. Then 5%—the allowable portion of the business use of the home—of $22,000, which is the total expense of the home, is $1,100, which would be the total business use of the home expense claimed in Form T2125.
Please note that Canadian tax software programs will automatically calculate expense shares based on your personal/business workspace ratio.
Workspace Adjustment in Household Expenses for Mixed Use
If you operate a part-time business out of your home and use the space for business and personal activities, you should adjust your work-from-home expenses accordingly. For example, suppose you have a home office that you use to run a consulting business five days a week, and the rest of the time the office is used for personal activities. To calculate your home business use expenses, figure out how many hours a day you use your home workspace for business purposes, divide that amount by 24 hours, and multiply the result by the business portion of your total. home spends.
Using the same example, and operating the business from 9 am to 5 pm, five days a week, seven hours a day, the business is operating 35 hours per week out of a total of 168 hours per week. So the deductible business use claim would be reduced by:
35/168 hours x $1,100 = $229.17 – Your total home-based business tax deduction
Keep in mind 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 the expenses of business use of the home to create a business loss. Therefore, your deduction cannot be more than your net income before deducting these expenses. If the deduction exceeds your net income, you can carry over the amount of these expenses to the next year.
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 need to be well informed about what business expenses can be deducted from your income tax. Find out if you meet the CRA’s definition of home business use to claim the home-based business tax deduction on your tax return.