Business-Use-of-Home Expenses for Sole Proprietors in Canada
When you use part of your home to do your business as a sole proprietor it makes sense that part of your home’s expenses can be deducted against your business income.
But it’s not quite as simple as that. Read on for a few more details on home workspace expenses.
The first question is determining whether or not you can actually claim your home workspace.
To determine this, ask:
Is it my principal place of business? If yes, then you can claim your expenses. If no, then ask:
If you use the space exclusively for business AND you use it “on a regular and ongoing basis to meet your clients, customers, or patients” then you can claim your expenses. If no to both questions then you cannot claim your home workspace expenses at all.
The next question is determining what part of your expenses you can claim.
The base rule is to take the total area of your workspace and divide it by the total area of your home and multiply that percentage by your expenses to know how much of them you can claim.
However – if you only use your space for business part of the time, say you work at a kitchen island and it’s used for dinner prep at night, then further reduce your expenses by multiplying them by the percentage of time you use the space for business versus the total time in a day, week, year or month – whichever gives the most realistic overall picture. This would only apply if the space is your principal place of business – otherwise the expenses could not be claimed if you share the space.
The next part is gathering your expenses. Make sure you have receipts for everything you are claiming.
You can deduct a portion of your Heat, Electricity, Water, Insurance, Maintenance (this would be for things specifically related to the business workspace like cleaning products, or things that you require for the business for the home generally such as security), Mortgage Interest, Property Taxes, and Rent.
Avoid claiming depreciation on your principal residence or claiming a large percentage of your home as a business workspace or a rental (CRA says it has to be “relatively small”) if you don’t want to incur capital gains on the property (normally if not used for business or rental principal residences are exempt from capital gains).
References
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/business-use-home-expenses.html
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use/changing-part-your-principal-residence-a-rental-business-property.html
