The Canada Revenue Agency (CRA) recently released comprehensive information on a new simplified process for deducting home office expenses for 2020 and 2021. For millions of Canadians, this is the first year in which they are eligible to deduct certain expenses related to working from home on their taxes. It will also be the first year that many employers are navigating their responsibilities with respect to a remote workforce.
This bulletin discusses both the regular process for deducting employment-related home office expenses and the new simplified process for 2020 and 2021 tax years.
REGULAR PROCESS FOR DEDUCTING EMPLOYMENT-RELATED EXPENSES
An employee may deduct certain limited employment-related expenses from income if:
- The employee is required to incur the expense under his or her employment contract
- The expense is reasonably regarded as applicable to earning employment income
- The expense is not reimbursable by the employer
- The employee has a copy of Form T2200 completed and executed by the employer
To be eligible for home office expenses, an employee must either (1) be required to maintain a home office where the employee principally performs his or her duties (i.e., more than 50 per cent of the time), or (2) have a workspace that is used exclusively for meeting with clients in person on a regular basis.
Form T2200 is an employee-specific form that sets out certain conditions of employment, including reimbursed expenses, allowances and home office information. Many employers have been concerned about the time and resources required to complete Form T2200 for their employees.
OVERVIEW OF NEW SIMPLIFIED PROCESS FOR 2020 and 2021
The federal government announced in its 2020 Fall Economic Statement released on November 30, 2020, that it would be simplifying the process for employees who worked from home due to COVID-19 and are eligible to claim tax deductions for home office expenses. Details were limited in the statement, however, the CRA released comprehensive information on the new process on December 15, 2020.
For the 2020 and 2021 tax year only, employees who have worked from home for at least one month due to COVID-19 can choose to deduct home office expenses using either the temporary flat rate method or the detailed method. Eligible employees will complete and submit new Form T777S with their tax return.
Employees who worked from home in 2020 and 2021 for reasons unrelated to COVID-19 or have employment expenses other than supplies or home office expenses must follow the usual process and obtain the regular Form T2200 from their employer.
Temporary Flat Rate Method
Overview. The new temporary flat rate method will allow eligible employees to deduct C$2 per day for every day worked at home due to COVID-19, without regard to the expenses actually incurred, up to a maximum of C$400.
Eligibility. To be eligible for the temporary flat rate method, an employee must have worked from home due to COVID-19 more than 50 per cent of the time for a period of at least four consecutive weeks in 2020. Employees who chose to work from home when given the option are still eligible for the temporary flat rate method. Employees may count the days in the four-week period and any other day the employee worked from home due to COVID-19. Employees are not permitted to count days off, vacation days, sick leave days or other leaves of absence. Eligible employees may still claim the deduction if their employer reimbursed some home office expenses.
Required Documents. Employees will not need any other supporting documents or a form T2200 or T2200S from their employer. We would expect that employees would need to be able to demonstrate which days they worked from home in 2020 if the CRA were to conduct an audit.
Regular Process Simplified: New Detailed Method
Overview. Under the detailed method, employees may deduct the actual amount of supplies and home office expenses incurred while working from home, provided they have the necessary supporting documentation and a completed new Form T2200S from their employer.
Eligibility. Employees who meet the eligibility requirements for the temporary flat rate method are also eligible to use the detailed method.
Eligible Expenses. Eligible expenses are limited to supplies consumed during employment and home office expenses used directly for work and not reimbursed by the employer. The chart below sets out common eligible/non-eligible expenses. A more detailed list of eligible/non-eligible expenses can be found on the CRA’s website. The list of eligible expenses is the same as under the regular rules. The one recent change (applicable to the regular process and the simplified process) is that the CRA announced that reasonable home internet access fees (but not connection fees) are eligible expenses.
Employees can deduct home office expenses only for the part of the year the employee worked from home and the portion of the home office expenses related to working in their home office. Employees will need to determine the size of their workspace at home as a proportion of the overall size of home (e.g., the spare room is 10 per cent of the size of the apartment). The eligible portion of the expense will also depend on whether the space is used exclusively for work (e.g., a designated room) or a shared space (e.g., the dining room table). If an employee has a designated room, the deduction is not affected by the hours the space is used for work. However, if an employee is using a shared space (e.g., dining room), the deduction is based on the percentage of time that space is used for work (e.g., 40 hours out of 168 hours each week).
As an example, eligible employees who pay C$2,000 per month in rent and have a workspace that is 10 per cent of their apartment would be eligible to deduct (1) C$200 per month if the workspace is a designated room, or (2) C$47.60 per month if the workspace is a shared space used 40/168 hours a week for work.
Required Documents. Employees will need supporting documents for the expenses that they deduct from employment income. Employees will also need an executed new Form T2200S from their employer. The new Form T2200S is a simplified version of the traditional Form T2200. New Form T2200S is a one-page document that requires the employer to complete the employee’s name, the employer’s address and answer three yes or no questions. The employer then completes the employer declaration.
Common Eligible and Non-Eligible Expenses
- Rent paid for a house or apartment
- Electricity, water, heat or the utilities portion of condominium fees
- Maintenance (minor repairs, cleaning supplies, light bulbs, paint, etc.)
- Home internet access fees
- Office supplies (stationary items, pens, folders sticky notes, postage, toner, ink cartridge, etc.)
- Employment use of a basic cell phone service plan
- Long distance calls for employment purposes
Employees who earn commission income can also claim the following:
- Property taxes
- Home insurance
- Lease of a cell phone, computer, laptop, tablet, fax machine, etc. that reasonably relate to earning commission income
- Capital cost allowance
- Mortgage interest
- Principal mortgage payments
- Capital expenses (replacing windows, flooring, furnace, etc.)
- Office equipment (printer, fax machine, briefcase, laptop case or bag, calculator, etc.)
- Monthly basic rate for a landline telephone
- Cell phone connection or license fees
- Internet connection fees
- Purchase of a cell phone, computer, laptop, tablet, fax machine, etc.
- Computer accessories (monitor, mouse, keyboard, headset, microphone, speakers, webcam, router, etc.)
- Other electronics (television, smart speaker, voice assistant, etc.)
- Furniture (desk, chair, etc.)
The content of this blog/article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our firm does offer a FREE initial consultation (30 minutes). Should you require further guidance/assistance, please contact us by email at [email protected] or by phone at (905) 836-8755.