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Reduce Your Taxes with Business-Use-Of-Home Expenses

Reduce Your Taxes with Business-Use-Of-Home Expenses

If you have a home business, it makes sense to ensure that you get the best possible tax result. The CRA allows for you to deduct certain expenses from your business income so that the burden of the costs of making money don’t cause you financial problems.

Claiming Expenses for the Business Use of Your Home

If your home is your principal place of business, you can claim Business-Use-Of-Home expenses on page 3 of the T2125 form.

The expenses allowed to be claimed include:

  • Heat
  • Home Insurance
  • Electricity
  • Maintenance (i.e. cleaning materials)
  • Mortgage Interest (interest only, not mortgage payment)
  • Property Taxes
  • Water (if applicable to your business)

The amount you can claim is based on the square footage of the area used for business use. For example, if your house is 1,500 sq ft and the office you work out of is 150 sq ft, then you can claim 10 per cent of the expenses above if you use this room solely for business activities.

If you also use the room for personal use, you also have to calculate the fraction of time that it is used for business use. For example, if you do 4 hours of work a day, 5 days a week, then you have to take 20 hours (4 x 5) divided by 168 hours (24 x 7). In this example, that’s 11.9 per cent. That would be multiplied by the square footage calculation and you would only be able to claim 1.19 per cent of the above expenses. Obviously, you would be better off if you use the room only for business activities.

It’s vital that you keep good records of your expenses, and that you pay attention to how much you actually use your home for business purposes. You want to make sure that everything is done properly so that the CRA can’t claim that you owe more money in taxes.

Applying Home Business Expenses Against Net Income

Unlike the business expenses and Capital Cost Allowance you can use to offset some of your tax liability, Business-Use-Of-Home expenses can only be applied against a net income and cannot create a net loss.

For example, if you have $2,000 in business net income and $1,500 in Business-Use-Of-Home expenses then you can claim the full amount. If you have a net loss (income minus expenses), then you cannot claim the Business-Use-Of-Home expenses that year.

Even so, the dollar amount you calculated should still be entered into the tax form as it can be carried forward to future years. This is a nice feature of the tax system. That way, once you are finally achieving a positive net income, you can claim the carried forward amount up to the amount of your net income. If you still can’t claim it all, carry forward the remaining to the next year. Your Business-Use-Of-Home expenses can be carried forward indefinitely, and this is a great help to you in later years as you begin making more money.

While you will have to pay taxes on business income, it doesn’t mean that you have to pay on your gross income. Use these expenses to reduce your net income, and your tax liability.

Comments

  1. Victor

    When I claim heat, insurance, electricity etc. expenses should I enter amounts including paid GST/PST or without them? And the same question for CCA.

    Thanks for the great series of articles.

  2. Tom Drake

    Thanks for the comment!

    Including GST, and I believe PST, depends on one thing… whether you are collecting GST on sales or not.

    If you do not collect GST, then you can include the GST in your expenses and CCA.

    If you do collect GST, then you use an input tax credit and can’t include that same amount in your expenses. I’m not familiar with it as I don’t fall under this category, but I believe an ITC offsets GST you have collected so that you submit less to the CRA.

  3. Victor

    No, I do not collect GST.
    I’m freelance web designer/programmer with a few projects a year with revenue less $30000.
    That means I’ll include GST in my expenses. Thanks again for clarification.

  4. marian

    I recently came across your website and have enjoyed reading the articles esp the ones about investments instruments for TFSA/RRSP .

    I hope you have more articles about REITS/and investment funds.

    • Tom Drake

      Marian, thanks for the comments. I will definitely have more posts on REITs and funds in the future!

  5. BusinessMan

    Can I claim the GST paid on business-use-of-home expenses when filing my GST return?

    • Tom Drake

      BusinessMan, If you collect GST, then the GST you pay is an input tax credit, not claimed in Business Use Of Home expenses. You’ll find more detail in the comments above.

  6. Jerry

    Further to BusinessMan’s question, I would like to know how to handle ITC’s for home business expenses as well as vehicle repair and fuel costs. I collect GST, report quaterly and have been including total fuel and vehicle repair amounts. Trouble is at income tax time, only a percentage of these are allowable based on business versus personal use. Are you picking up what I’m putting down?

    • Kelly Christian

      To allow for this you have to make an adjusting entry to deduct the amount of GST ITC’s at the end of the year on your final GST summary (ie. if you can only claim 40% then you need to subtract 60% of the GST ITC’s you claimed during the year to allow for this at year end from the current amount of ITC’s). If you do not this is one of the first things they look at in a GST audit.

  7. Darrin

    Great to see we can carry forward the home business expenses. Your site does a great job answering all my questions.

  8. Kim

    I provide cleaning services as an independent cleaner for a large company. I’m not on their payroll; I invoice them every month for a fixed amount. I don’t have a business licence/registered company. Can I claim business use of home expenses? plus auto expenses ? Both are needed for my service. Full income is declared with CRA but I’ve never declared expenses.

  9. Angel Hedderson

    Hi,
    I just recently signed to It Works Global as a independent distributer. I am not making a fortune by no means but I am wondering how to go about claiming taxes and what to claim. Is there a certain amount you have to make in Canada before claiming? Any info would help

  10. Tahnya Kristina

    My accountant is great with this. Home expenses are a major advantage of being self employed. I have a 9 to 5 but I also have a side business and declaring home expenses really help my tax refund. Although I do know that some people push it to far. I am a financial planner and I have a client who is also self employed. She tried to deduct her dog food because she had to feed the dog while she was at home (like child care I guess). She also tried to deduct her personal trainer expenses because she was unable to go to a gym since she worked from home and had to be there to meet clients. I am not sure but I can bet she was audited by CRA.

  11. Dan

    @Victor you’d claim the full amount of the eligible expenses paid and CCA is the tax version of amortization taken on capital assets used to earn business income, so there is no GST/PST on CCA (I’m assuming you’re referring to capital cost allowance)

  12. Dan

    @Kim you can claim business us of home expenses provided that you use a portion of your home to earn business income. No need to be on payroll to claim the expenses

  13. My account asks me which percentage of my home I use for work. This helps him deduct certain expenses related to my work from home. If I have a 2 bedroom apartment with a kitchen, living room and bathroom and one room is my home office I can say that I use 1 room of the 5 for my home office and therefore 20% of my space.

  14. rob

    Hi,
    Can business use of home expenses only be used to reduce business income or income from other sources. I am employed by a company but also have sef employed income from a home based business. Currently my business expenses are in excess of my business income.

  15. Sam from BeSmartRich

    Thanks for your wonderful explanation.

    What about this?
    -I purchased a car in 2012 for personal use.
    -I started my home business in 2014 and 25% use my car usage is for the business
    -I know that I can claim business related car expenses during the year but what about CCA? Can I fair value the car as of 2014 when I started my home business and claim the fair value as addition during the year and claim CCA? or I am not able to claim for CCA?

    Thank you in advance!

  16. Andrea

    I’m not sure I understand how you can claim business-use-of-home expenses on your GST return as an ITC if they are expenses incurred personally and not run through the business books? How do we handle that? I do collect GST, but don’t include GST paid for business-use-of-home expenses as ITC’s, therefore my b-u-o-h expense is inclusive of GST. Am I in trouble? LOL.

  17. Kate

    I moved into a 2-storey house at the end of 2013, and now have to re-calculate the portion of my home that I use for business for the 2014 tax year. Top floor: not used for business. Main floor: open concept, use approximately 20% exclusively for business. Basement: finished, keep filing and some business supplies there. Can you tell me how to calculate? thanks!

  18. Judy

    Hi Tom

    I have had a home business for several years. I want to apply for a mortgage this year. Can I skip using my business-use-of-home expenses carry-forward from last year and this years expenses to use next year? If I apply them this year it reduces my income too much and will make my eligibility for a mortgage difficult.

    Thanks Judy

  19. Miles

    I have some questions about calculating home office space:

    1) Someone above suggested simply counting rooms: 5 rooms, 1 is office therefore 20% of rooms used for office. I’ve also heard about using square footage: home is 1200 square feet, office is 120 square feet therefore 10% of total area is for office. What is the accepted method?

    2) The square footage of a home rarely includes basements. How should one calculate the allowable space if an office is a finished corner of an otherwise unfinished basement?

    thanks

  20. Steve

    Question: If I just simply did not claim work-at-home expenses at all in a previous year, can I still “carry forward” the amount to the current year (even though it is not really a “carry forward” of an unused portion)? Or would I have to go back and re-do the previous year’s income tax if I wanted to claim those expenses? Thanks!

  21. Debra

    Hello, I am so pleased to find your site. We have a small business that we run from our home and claim the use of the office. We have been in business for 10 years. After reading some of the comments I am wondering if we could have been claiming some of our yard as business expense. We have a junk removal business and use about a third of our yard (we live on an acre) to sort the junk etc. Probably the only portion that we could claim would be applicable mortgage interest and property taxes. Also where would we claim that portion so that we could keep it separate from the home office.

  22. Jane Duval

    I have a question re automobile purchased in 2014 for personal use.

    I started my home business in 2015 and 25% of my care use is for the business

    I believe I can claim business-related car expenses during the year, but what about CCA? Can I fair value the car as of 2015 when I started my home business? That is, can I take the car into my business and claim 25% of eligile CCA? Or I am not able to claim for CCA?

    Many thanks in advance for your reply.

  23. Chris

    Can home renovation costs that create a primary office space be used as a business use of home expense?

    I have a home-based corporation and bought a new home with an unfinished basement after starting the business. Can I claim the portion of the office (19%) as a business use of home expense and also the same percentage of the cost against my GST account?

  24. Rob Kooy

    Hi Tom, I appreciate your website and advice. My wife and I are looking to maximize our tax deductions. I’m employed fulltime, and she runs a private daycare out of our home. Up to now she’s sole proprietor. If I were named as partner, since I’m often home for part of her workday, could this improve our tax situation? I need more deductions to offset my income. Thoughts?
    Thanks!

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