If you use a part of your home to run your small business, the Income Tax Act allows you to deduct the fees related to the business portion of the home’s usage. Find out what you need to know to get the most out of the deduction.
Claiming the Deduction
When preparing your tax return, you must complete and join Form T2125 (Statement of Business and Professional Activities) to claim your deduction. This is the general form for a sole proprietorship and includes the deduction for business-use-of-home expenses.
Home office expenses cannot be used to generate or augment a loss. Therefore, the amount that you can claim is limited to the total income generated by your business. Even If you don’t have enough business income to claim the full amount you’d otherwise be entitled to, the deduction can be carried forward to other years.
There is no bright-line test to determine the amount of the deduction to which you are entitled. Under the tax laws, you must use a method that is reasonable in light of the type of business you have. The portion of your home that you will base the deduction on must be exclusively dedicated to your business, such as a home office or a workshop.
The most common method that is used is to deduct a percentage of your home expenses that is equal to the percentage of your home’s total area that is used for your business. For example, if your home office represents 10 percent of your home’s total area, then you can reasonably deduct 10 percent of your admissible expenses. This method is almost always accepted by the Canada Revenue Agency.
There are cases where the percentage area is not an appropriate method, such as if you grow food in a garden for transformation or resale or if you have completely converted a building adjacent to your home for business use. In such cases, it is your obligation as a taxpayer to find a method that is reasonable under the circumstances.
In general, once you have established a percentage of use of the home, you can deduct a percentage of just about any amount you spend on the home. This includes some fairly obvious elements, such as interest on mortgage payments, municipal and school taxes, insurance, and electricity
There are also some slightly less obvious elements, such as current repairs and general upkeep. The latter goes so far as to include cleaning services or supplies.
You can also deduct telecommunication services, such as internet and telephone services. In those cases, especially if you run an internet-based business, you may reasonably consider deducting a higher percentage, since you probably use these services largely for your business. The same goes for office supplies, which can probably reasonably be considered to be used only for your business activities.