17 May 2000 External T.I. 2000-0022015 - HOME OFFICE EXPENSES OF EMPLOYEE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Can an employee (who is not a commission sales employee) deduct capital cost allowance on renovations made to his home to construct enclosed office space? Can an employee deduct a portion of mortgage interest, taxes and insurance in respect of office space in the home?

Position: In the case of all the above expenditures, no deduction is allowed.

Reasons: Deductions for home office expenses can be claimed under paragraph 8(1)(i) of the Act, subject to meeting the conditions in subsection 8(13). 8(1)(i) only allows deductions for supplies consumed. Paragraph 6 of IT-352R2 also specifically prohibits a deduction for those expenses. A reasonable portion of property taxes and insurance paid can only be claimed by commission sales employees entitled to claim expenses under paragraph 8(1)(f).

		2000-002201
XXXXXXXXXX 	David Shugar
		957-2134
Attention: XXXXXXXXXX 

May 17, 2000

Dear XXXXXXXXXX:

Re: Home Office Expenses

We are responding to your correspondence of April 18, 2000, concerning the deductibility of mortgage interest, taxes, and insurance in respect of office in your home, and capital cost allowance on renovations made to construct an office space in your home. In your letter, you state that your home office will require approximately 400 square feet of private self contained lockable space, six telephone lines, and several pieces of office equipment.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Canada Customs and Revenue Agency (the CCRA).

A deduction for office space in the home expenses is made under subparagraphs 8(1)(i)(ii) and (iii) of the Income Tax Act (the "Act"). Generally, an employee, in computing income for a taxation year, is allowed to deduct amounts paid for office rent, supplies, and salary to an assistant or substitute. Subject to certification by the employer, these expenses are deductible provided the employee is required by contract of employment to supply and pay for them.

An employee will only be able to deduct a particular expense if it has been paid for in the year and fits within a specific provision of the Act which permits such expenses. Subparagraphs 8(1)(i)(ii) and (iii) of the Act state:

"8(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto ...

(i) amounts paid by the taxpayer in the year as

...

(ii) office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment,

(iii) the cost of supplies that were consumed directly in the performance of the duties of the office or employment and that the officer or employee was required by the contract of employment to supply and pay for,

...

to the extent that the taxpayer has not been reimbursed, and is not entitled to be reimbursed in respect thereof;"

Pursuant to subsection 8(2) of the Act, expenses which are not permitted by section 8 of the Act cannot be deducted in computing income from an office or employment. Regardless of whether the individual owns or rents the home, the work space expenses otherwise deductible as "supplies" under subparagraph 8(1)(i)(iii) of the Act consist of a reasonable proportion of expenses paid by the individual for the maintenance of the home, such as the cost of fuel, electricity, light bulbs, cleaning materials and minor repairs. For purposes of determining the proportion of the expenses referred to above that is otherwise deductible, these expenses should be apportioned between the employment (i.e., work space) use and the non-employment use of the home on some reasonable basis, such as square metres of floor space used. An employee living in rental accommodation would be entitled to a deduction for a proportionate amount of both the rent and utilities paid in respect of the employee's living accommodation. Note as well that an employee who owns his or her own home cannot deduct the equivalent rental value of the portion of the premises used for the office.

While paragraph 8(1)(i) of the Act sets out the conditions under which "office rent" and "supplies consumed" are deductible to an employee, there is no provision in that paragraph, or any other, which would permit the deduction, as home office expenses, of mortgage interest, property taxes and insurance, or capital cost allowance, to an employee in the circumstances described in your letter. In addition, employees cannot

deduct the cost of any additional mortgage interest, property taxes and insurance, or capital cost allowance that may be required or incurred as a result of working at home. A reasonable portion of property taxes and insurance paid can only be claimed by commission sales employees entitled to claim expenses under paragraph 8(1)(f) of the Act.

In your letter, you stated that the office in your home meets local zoning regulations. There is no statutory requirement that the work space be zoned or assessed for commercial or business use in order for an individual to be entitled, if that individual otherwise qualifies, to deduct an amount in respect of a work space in the home. The CCRA has no authority under the framework of income tax legislation to require that the individual establish that the work space or self-contained domestic establishment in which the work space is located be zoned or assessed for commercial or business use.

In order to claim a deduction for home office expenses the employee must be required by the contract of employment to provide the space and to pay for the related expenses. Where an agreement is in place governing the conditions for working at home and it obligates or requires the employee to supply and pay for supplies consumed directly in the performance of the duties, amounts paid by the employee for such supplies would be deductible pursuant to the above mentioned provisions of the Act, provided that the appropriate employer's certification (form T2200) is filed with the employee's income tax return as required by subsection 8(10) of the Act and subject to the limitation imposed by subsection 8(13) of the Act.

Subsection 8(13) of the Act prohibits the deduction of office in the home expenses, unless the individual either principally performs the duties of the office or employment in the work space, or the work space is "used exclusively ... for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties." For purposes of the Act generally, and in reference to subsection 8(13) of the Act in particular, the term "principally" means more than 50% of the time.

Confusion has arisen over the reference to the word "required" in the Act and form T2200 and the fact that a work at home arrangement may be voluntarily entered into by an employee. Although a work at home arrangement may be voluntarily entered into, in our view, once an employee and the employer have entered into a formal work at home arrangement, the employee is "required" to provide a work space in his or her home and pay for some additional costs associated with providing this work space. In our view, an employee under an informal work at home arrangement would not be entitled to deduct office in the home expenses.

One of the purposes of requiring an employee to file form T2200 duly signed by the employer and certifying specific conditions of the employee's employment is to ensure that an employee can only deduct those expenses he or she is potentially entitled to deduct. It is incumbent upon the employer to make clear the types of expenses which the employee is required to pay and for which the employee did not receive any allowance or repayment. In other words, the items which an employee seeks to claim may actually be disallowed on the basis that it does not agree with what the employer has certified as actually being required to be paid by the employee.

Interpretation Bulletin IT-352R2, 'Employee's Expenses, Including Work Space in the Home' provides more detailed information on the conditions necessary in order for an employee to deduct any expenses incurred in maintaining an office in the home. A copy of the Interpretation Bulletin is enclosed.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Attachment

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