Working From Home? Mind the Tax Rules

More than three months since the coronavirus crashed down on the economy, many employees have been working from home. In most cases, this arrangement has been successful, keeping staff safe and healthy – and also has resulted in surprising productivity.

The positive work experience has been aided by employees’ ability to set up efficient workstations in their homes. In some cases, this has simply meant adapting an existing home office or study to one’s daily work requirements. In other situations, it may have required creating new space and putting in needed furniture and equipment. Depending on who pays for any needed home-office set-up costs, such expenses may be tax-deductible to the employee.

The Tax Definition of a Home Office
While an employee can deduct some of the same home-office costs as a self-employed person, there is at least one key difference: as an employee, you must be required by your employer to work from home. This requirement has to be formalized on Canada Revenue Agency Form T2200 (and in respect of an employee who is a Quebec resident, Revenue Quebec form TP-64.3-V), signed by the employer.

“Simply permitting employees to work from home may not meet the eligibility criteria and employers should not issue a T2200 under this circumstance until the CRA issues administrative relief or other guidance,” says Guy Jason, a partner and National Service Line Leader, Global Employer Services, with Deloitte.

When there is a requirement to work from home, the CRA has indicated that a formal written arrangement may not be required. In addition to having the employer complete Form T2200, having your employer also document this arrangement in writing does not hurt. “An email clearly laying out the terms – stating that the home workspace is where the employees mainly (more than 50% of the time) do their work -- could be considered sufficient,” Jason says.

You must determine what portion of the defined workspace represents your home’s total square footage (including hallways, bathrooms and kitchen) and calculate what percentage of your home-operating costs will be deductible. Examples of such costs are listed below.

Note that the designated workspace can also be used for personal purposes. For example, it could be where you look after household bill-paying or personal correspondence. It also might double as a den in the evenings. You must, however, pro-rate deductible expenses according to the amount of time the space is used for employment-related work.

The Income Tax Act doesn’t specify whether these criteria apply to the temporary use of a home office for employee-work purposes – such as may be the case if, for example, you are required to work from home for say, six, months of this year. However, it is anticipated that the tax authorities will approve such situations, given the circumstances presented due to COVID-19.

There is a second, alternative qualifier that can allow an employee to claim home-office expenses. Tax deductibility is possible if you use a particular room or portion of your home exclusively to earn employment income and you meet “customers or other persons” in this space on a regular and continuous basis. While the CRA specifies that such meetings must be face-to-face, it is possible that, given the pandemic reality, meetings conducted by telephone or video conference will be acceptable. “However, it’s advisable to wait for further guidance from CRA before taking this position,” Jason says.

What Can you Deduct?
Once it has been established that the home office will be legitimate in the eyes of the taxman, you can deduct expenses for the employment-related use of the relevant space, as well as any office-supplies used as part of executing your duties.

Home-related expenses include the pro-rated portion of rent, heating, electricity, cleaning materials and minor repairs. Unlike self-employed individuals, as an employee, you cannot claim any portion of mortgage interest, property taxes, and home insurance premiums. Nor can you deduct depreciation (capital cost allowance) on any elements of your workspace – although generally speaking claiming depreciation is inadvisable, as it would affect your ability to designate your home as a principal residence (and escape capital-gains tax) when the time comes to sell it.

When it comes to telecommunications – ironically, given that this is crucial to an employee’s ability to work from home – the cost of existing personal cellphone, telephone and internet service, and related computer/telecom hardware, cannot be deducted. The exception is cellphone service, but only if it can be proven that the phone is used exclusively for work purposes.

You can deduct the cost of office supplies such as paper, pens, pencils, printer ink and the like. “These materials should be consumed directly in the performance of employment duties when the employee is required to provide and pay for such supplies.,” says Jason. As with any claim to be made on your tax return, ensure you have all receipts on file.

Even Employer-Paid Items Owe Taxes
In most cases, if your employer provides you with furniture or other office equipment -- and allows you to retain these items after the requirement to work from home ends -- these costs will be considered a taxable benefit. Similarly, if your employer reimburses you for the purchase of office furniture or supplies, you’ll owe taxes on that benefit.

However, in April, the CRA announced that, due to COVID-19, it will not consider as a taxable benefit a reimbursement by an employer of up to $500 for purchases of technology equipment that enables an employee to work from home, as long as a receipt for such purchases is submitted.

“In some cases, companies may consider providing an allowance or stipend to the employees to purchase necessary office supplies. In lieu of a cash allowance, companies may also choose to reimburse employees to purchase necessary office supplies and equipment, such as monitors, desk, and office chairs.  Such allowances and reimbursements are generally taxable to the employee, Jason says.

In some cases, an employer may cover the additional tax burden created by a taxable benefit, but bear in mind any amounts paid to the employee – including this “tax gross-up” -- will result in a taxable benefit. “Whether the employer will bear the additional tax cost on the benefit or the employee will be responsible for the tax should be clearly communicated to employees to avoid surprises later,” Jason says.