Today were going to talk more about the new ways that Canadians working from home due to COVID-19 can now claim some of their expenses to cut their tax bills. We actually covered this back in the depths of July last year – which now seems like a lifetime ago. We now we know all about how the updated program works.
So we’ll talk about who can claim this deduction, what can be claimed, how they can do it, and the best way of doing it. As always, I’ll include a whole bunch of important links in the show notes and the full transcript of today’s episode.
Claiming Work From Home Expenses
So the way that this program works is that you can claim eligible expenses as a tax deductions. For those that need a refresher, a tax deduction reduces your taxable income before taxes are calculated on the amount. Probably the most common tax deduction that most of you will know about is from RRSP contributions – so this works in a similar way.
The amount that you actually save in tax dollars really depends on the province that you live in but can range from zero to about 50% of the reported expenses. This percentage can be found by looking at your combined federal and provincial tax rate and the percentage increases as you command a higher income.
This tax deduction is also only available to those that are not self-employed as these expenses are traditionally already claimed a different way.
This tax deduction has actually been around for awhile, but this year the federal government has made it easier to claim by making a simplified version of the program – called the “temporary flat rate method” and making the more detailed version of the program of the program easier to apply to as well.
Deciding between the two versions of the programs is one of the big decisions that need to be made.
The simplified version offers a deduction up-to a $400 and requires no paperwork while the more detailed version is limited to the earned income from the home employment role and requires you to record your expenses, provide proof if requested and a signature from a superior.
So basically the choice is between a quick non-bureaucratic option or a more time consuming option that can yield a much larger tax savings.
The major criteria for both versions of the program is that you were required to work from home due to COVID-19 and that you had to pay expenses required for employment. These claimed expenses could also not have been reimbursed by your employer.
The work from home aspect is defined as working for at least 4 consecutive weeks in 2020 where 50% or more of that time was done at home.
If an employer gives the employee the decision to work from home or to go to the office and the employee chooses to work from home then this is deemed by the CRA to be working from home due to COVID-19.
Simple Method – Temporary Flat Rate Method
Under the simplified program, one is eligible for $2 per day worked from home as beginning from when you meet the work from home definition. These days obviously exclude vacation, days off, etc. So to receive the full $400, you would have had to have worked from home for at least 200 days during 2020. This includes full and part-time days.
nder the simplified program you don’t need to provide any paperwork.
Work From Home – Detailed Method
Now, the detailed method is a little more complicated but can definitely be worth your time as you can claim all of your eligible home office expenses which could turn out to be much higher than under the simplified option. The downside with this option is that you will need to keep records of your expenses, have to do some calculations, and have an employer sign off on a form.
The work from home rule is the same under this plan where you need to have worked for four consecutive weeks with over 50% of that time at home. However, one big difference between this plan and the simplified program is that you can only claim periods of time where you worked from home for more than 50% of the time.
To understand this important detail further, let’s go through an example. Let’s say Jean worked from home for 3 months where he was at home 3 days a week and was at the office for 2 days a week. Then after that, he ended up doing 2 days at home and 3 days in the office.
Under the simple option, Jean would be able to claim all of those work from home days. That’s because once the clause of four-consecutive weeks is triggered then all subsequent days can be used – even if he worked less than 50% of the time at home
Under the detailed plan, Jean would only be able to claim the first three months and the rest of the time would be disqualified as he worked from home for less than 50% of the time.
Under the detailed plan, you can only claim eligible expenses incurred during these eligible periods that you worked from home.
Conversely, you could also claim the workspace if it meets the CRA’s following definition – “You only use your work space to earn employment income. You also have to use it regularly and continually for meeting clients, customers, or other people while doing your work.”
If you qualify, then it’s important to understand which employment expenses can be claimed.
What Expenses Can Be Claimed
So if you’re salaried, you can claim electricity, heat or portions of condo fees that pay for these utilities, internet, minor maintenance of the work area, and importantly rent. If you’re paid commissions, you can also claim property taxes, property insurance, and leases of select items like cell phones and fax machines for anyone that is still using one of those.
There’s an additional form that can be used to claim certain cell phone expenses and office supplies.
Expenses that cannot be claimed include mortgage interest and principle, capital expenses, wall decorations
As you can see this list is pretty extensive and how it could easily lead to a much higher deduction than the simplified plan.
Calculating Your Work From Home Expenses
Now, unfortunately the calculation just doesn’t stop there – what’s next is you need to determine the proportion of the eligible expense that used for employment. This is really a two-step process.
The first-step is to determine the percentage of space used for your workplace compared to all finished space of your dwelling. Finished space includes hallways, bathrooms, kitchens, bedrooms, etc.
To do this, you’re supposed to measure the space that you use to work and then divide it by the total size of the finished space. This then gives you a percentage of what can be claimed.
But that’s not it! You also need to determine the amount of time that is used for work versus personal usage of this space. If you have a dedicated workspace than it’s simply 100% but if you only use it partially for work then you need to determine your weekly work hours and divide it by 168. 168 is how many hours are in a week. This then yields a percentage of time that this space is used for employment.
Then the final part of the equation is to first multiple your eligible expenses by the percentage used for your workspace. Then, this amount is multiplied by the amount of time that you use this expense.
This final amount is then how much you can claim. This is obviously complicated, but thankfully there is a calculator available online to help with this. I’ll share the link to this in the show notes.
So obviously keep copies of measurements, expenses, and calculations in case your file ever gets flagged for an audit. Home expenses are also one of the biggest causes for audits.
So the big question is if this is worth your time? If you rent or have a dedicated workplace then the likely answer is yes but you really need to decide for yourself as everyone’s situation is difference.
Working From Home Example
Let’s do another example to show the impact. Jestine has worked from home since April 1st and has a dedicated workplace in a condo. This workspace is 15% of her total unit and is exclusively used for employment. Since it’s a dedicated space, she can claim the full 15%. Now, let’s say that her rent is $1,700 and other eligible expenses are $300 a month which means that she has a total of $2,000 a month in eligible expenses.
So since she worked from home for 9 months, her total eligible expenses are $18,000. This is then multiplied by the percentage that is used for employment – in our example that’s 15%. This means that her eligible deduction is $2,700.
We can go even further and estimate how much of a tax savings this will yield for Jestine. Let’s say that her marginal tax rate is 30%. This marginal tax rate can generally be multiplied by the deduction to see how much she would save in taxes.
So under the basic plan, this will reduce her taxes by only $120. Calculated by simply multiplying the $400 basic amount by 30%.
If she did the extra work to claim the $2,700 in extra expenses then she would have a direct-tax savings of $810 – which is nearly an additional $700 after-taxes for the extra work that she does.