As a sole proprietor, you are allowed to deduct a portion of your home expenses as a cost of operating your business, but this deduction must be applied with discretion. The CRA outlines its rules at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/t2125/ln9945-eng.html .
The first step is to ascertain whether or not your home office qualifies. The first condition is “it is your primary place of business”. For most business people, it is their only place of business so it easily qualifies; they may go to clients’ offices and even have a desk or space provided, but their books and records are all at home in that desk. If you have space provided at your clients’ office and keep all your documents there, you need to check the second rule.
The second condition – if you failed the first test – is that “you use your home office space only to earn business income” (it is a dedicated space) “AND you use it on a regular and ongoing basis to meet clients”. So a physiotherapist who has an office at home and meets clients there can claim those expenses even though she also works on contract for another medical practitioner.
In order to make this calculation, you need to keep records of (1) heat, hydro, and insurance paid during the year, (2) rent or mortgage interest and property taxes paid, and (3) the square footage of your office space versus (4) the square footage of your entire living space. Never deduct any amount for depreciation of your home – it will come back to cost you later.
Daycare operators and similar businesses have a particular challenge: they use part of their home for both personal and business. In this case, the percentage of the day or week that the space is used for business must be added into the equation.
Home expenses cannot be claimed if your business has a loss, but they can be carried forward to a future year. Alternatively, you may find it makes more sense to claim your property taxes or rent on the Application for Ontario Trillium Benefit.
If you have incorporated and work from home, your company can claim business use of home as a rent expense. Ensure you do the calculations as directed above – if your company pays you more than its proportionate cost you must file a rental schedule with your personal tax return and pay tax on net income you received.
Gwyneth James MBA CGA is the owner of TCP Accounting & Tax Services which has been providing accounting services for over 20 years to individuals and small businesses throughout Peterborough City and County. (705) 876-6011 or www.tcpaccounting.ca