Working from Home? You May Now Qualify for A Deduction
On today’s episode we’re going to uncover a hidden tax benefit that may be able to cut hundreds of dollars from a salaried employee’s tax bill. In the past, this benefit is mainly used by those that are self-employed, but this is no longer the case as work at home arrangement have drastically changed due to COVID-19.
This benefit allows salaried employees to claim certain home office expenses and directly deduct the expenses from their income.
This deduction can be massive too! The CRA reported that the average claim in the 2018 tax year was $1,561. But what does this actually mean in dollar savings? This really depends on which province you live in and your situation. For example, in Ontario it would be about $313 at the lowest tax rate or $835.60 at the highest. Definitely no small amount!
So today we’re going to look deeper into this program, how to qualify, and importantly how to do everything right! At the end, we’ll also look at a bonus savings opportunity!
As a quick refresher, tax deductions reduce your taxable income dollar for dollar. So for example, if you have total employment income of $60,000 and deductions of $5,000 then your taxable income is $55,000.
This taxable income is then what tax rates are applied to, so reducing this amount is one of the ways that we can cut our tax bills.
A perfect example of another deduction is an RRSP contributions – every dollar that you contribute to an RRSP reduces your taxable income. So the work at home expenses would essential have the same effect on your taxes.
Working From Home Expenses
Expenses that you can claim include rent, electricity, heating, and maintenance charges like having a cleaner. Expenses that you’re unable to claim include mortgage principle and interest, home insurance, property taxes and Capital Cost Allowances – which is a fancy word to describe depreciation. For any of these expenses, you must also not received or have refused a workplace allowance to cover the fees.
To qualify, your workspace must be used the majority of the time – which is defined as over 50% of the time or an exclusive office space that is used on a regular and continuous basis for meeting with clients, customers, or other people in the course of your employment duties.
Those that have been working from home since March are quickly approaching the six-month mark of working from home which is over 50% of the tax year.
Another big qualifier is that your employer also needs to agree that you are required to work from home. This must be included in your employment contract and also included on a special tax form called the T2200. The T2200 form is pretty straightforward and is a three-page form with yes/no questions that ensures your eligibility.
How to Claim
If you qualify, you’re probably wondering how to receive use this deduction. the first step is to really keep records of all of your eligible expenses throughout the year.
You then need to determine how much of these expenses you can actually claim. This is a little complicated but it’s not too bad. Basically, what you’re trying to determine is the percentage of your workspace to total living space and the amount of time that you used that workspace. The most common way to do this is divide the square footage of your office by your total furnished area. This will then yield a percentage.
The amount you can claim on your taxes is this percentage of the total eligible costs. So let’s say that you paid $2,250 a month for rent and other expenses which is $27,000 over the year. You also determined that your office usage percentage is 20% – this then means that your income tax deduction would be $5,400 – which is a massive amount.
The next step is being patient as you’ll need to claim this when you file your 2021 income taxes.
When you finally do your taxes, the place where you include this is a tad hidden – you need to fill out a form T777 and the amount is included under the heading of “Other Deductions”. You can see how this can slip by pretty easily.
It’s important to point out that this deduction can only reduce any income from the associated employment and cannot reduce income past zero. However, any unused deductions can reduce future years earning at the same employer.
So that it for the work-space-in-the-home expenses deductions, but there are some other expenses that you may also be included on your taxes in the same.
Likely the most relevant one are supplies that are used for employment purposes that include items like printer cartridges, paper, stamps, and more. Like the other deduction, one must have this included in their work contract and not receive an allowance from an employer to claim the expenses. The T2200 must also be filled out supporting all of this.
You can also claim a portion of your cellphone plan, including any long-distance charges if you are required to use it for workplace purposes. As always, documentation should be kept to support this claim.