Pay Less Tax on Your Home-Based Business
Is your home where you principally conduct your business? Do you spend most of your business working hours at home? Is your home the place where you meet with clients, customers, or patients? If the answer is yes to these questions, the CRA has deemed you eligible to claim ‘business use of home expenses,” for your home-based business which calculates the percentage of your home expenses that are devoted to conducting your home business.
Work Space Calculation
If you work from a home office or use any space in your home, you will calculate the percentage of your workspace by dividing it by the total area of your home. For example, suppose you have a home office that is 10 x 10 feet in a house that is 2,500 square feet. The allowable portion of “business use of home” expenses would be 100 divided by 2,500 = 4%. The personal use portion would be 96%.
You will then want to calculate your home business tax deduction by deducting a portion of all your allowable household expenses, including utilities, telephone, cleaning materials, and the “business use of home” expense. If you own your own home, you can also claim a portion of your insurance, property taxes, and mortgage interest (not the mortgage). If you rent, you can claim a portion of the rent you pay.
Example of a Home Office Expense Calculation
|Percentage of home personal use (2,400/2,500 x 100)||96%|
|Maintenance and Repairs||$4000|
|Utilities: heating, hydro, electricity and water||$4000|
|Personal use portion (Total x 96%)||$18,720|
|Deductible Business Portion (Total x 4%)||$780|
In the example above, you are allowed to claim $780 as your total business use of home expense on your Form T125, representing 4% of your total home expenses devoted to your home office.
Mixed Use Space Calculation
What if you use your home office on a part time basis? How would you calculate your allowable “business use of home expense”?
You would simply divide the hours per day that you use for business use and divide that by 24 hours. Then multiply your result by the business portion of your total home expenses.
Using the same example above, say you work 6 hours a day, 4 days a week. That means you work a total of 24 hours a week out of a total 168 weekly hours.
You would reduce your allowable deductible business use claim of $720 as follows:
24/168 x $720 =$102.85. Your allowable deductible business portion of your home is now $617.15.
Capital Cost Allowance
In addition to the expense above, you can also deduct equipment that depreciate in value over time, such as filing cabinets, computers, and printers, which fall under the rules for capital cost allowance. According to the CRA, a capital cost allowance is a “tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to wear and tear or obsolescence.” You can’t deduct the entire cost of your equipment on your income tax for that particular year. Instead, you only claim a portion of the original cost as a tax deduction each year and continue doing this over a period of years until the property or the equipment fully depreciates.
The CRA website includes a guide to the most common classes of depreciable property.
Can you create a business loss using your business at home use deduction?
You must have income to apply your business tax deductions. You cannot use business use at home expenses to create a business loss. Therefore, your income must always exceed the deductions you apply. If you do find that your deductions exceed your income, you can carry your expenses over to another year when you will be able to claim a business use of home expense.
With so many of us working from home, it is now a good time to consult with one of Kalfa Law’s business and tax lawyers to find out how you can reduce the amount of tax you pay on your home-based business through “business use of home” tax deductions.
You will hard for your money. We work hard for you to keep it.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.