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:
- Home Insurance
- 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.