Top Home-Based Business Tax Deduction in CanadaBrian Jang ON February 23, 2021
It is pretty much a given that anyone who pays taxes is going to look for any deductions they can, but if you run a home-based business, you may not be aware of what is and is not eligible.
The CRA has very specific guidelines to determine whether or not a home business owner can claim particular business-use-of-home expenses. While there are specific deductions that are specific to home businesses, not every home business will be eligible for them.
Who Can Claim a Tax Deduction for a Home-Based Business?
To be able to claim business-use-of-home expenses, your home must be your principal place of business, or you must be using the work space in your home solely to earn your business income, and use it regularly to meet with customers, clients, or patients.
If you are conducting a portion of your business at home, while conducting another portion of it elsewhere, or if you merely conduct business at home on occasion, you cannot claim business-use-of-home expenses.
Claiming the Home-Based Business Tax Deduction
Provided you meet the CRA requirements, you may now calculate your business-use-of-home expenses. As you are conducting business where you live, your expenses will be a portion of your home expenses.
Having a specific area in your home—such as one room designated as your home office—is the easiest way to calculate your expenses. In this case, you would simply divide the area of your work space by the total area of your home.
For example, if you have a home office which measures 10 X 10 feet in a home of 1800 square feet, you would calculate 100 divided by 1800, then multiplied by 100, giving you 5% as your allowable portion of business-use-of-home expenses. The other 95% of your home would be reserved for personal, non-business use. Once you know what percentage you are able to claim, you can then look at the total amount of your household expenses.
The expenses that you can include in your calculations are those that relate directly to your business, such as your telephone, utilities, and cleaning materials. If you own your home, you may claim a portion of your house insurance, mortgage interest (though not the actual mortgage payments), and property taxes. If you are renting your home, you are able to claim a portion of your rent.
Assuming, for example, that your total expenses for the fiscal year are equal to $22,000, then the 5% (determined in the example above) would be equal to $1100. This would be your total business-use-of-home claim that you would enter on your tax form. Canadian tax software would calculate this for you, based on your personal/ business area ratio.
Calculating Mixed Use Space
If your home-based business is operated part-time, or if the space used for your business is also used for personal activities, you will need to adjust your expenses accordingly.
If you are running your business five days a week, and then using your home office for personal activities the rest of the time, you would be required to calculate the number of hours that you use the space for business each day, divided by 24 hours, and then multiplied by the business portion of your home expenses.
Referring again to the example above, if you are using the home office for work purposes totaling 7 hours each day, five days per week, then you are using it for a total of 35 hours each week, out of a week’s total of 168 hours. You would then calculate as follows: 35 (working hours) divided by 168 (hours in a week) times $1100 (the business portion of your expenses). This would give you a total of $229.17 to declare.
Note that you need to be making income to claim a deduction, as you cannot claim a deduction from non-existent income. In other words, you cannot use these expenses to create a business loss. Your deduction cannot be more than your net income. If it is, you can carry it forward to next year.
As is always the case with taxes, individual deductions may not seem like much, but you will want to take advantage of everything possible. If you are running a home-based business, be sure that you are aware of everything you are entitled to claim.
Need help with figuring out your home-based business tax deductions, contact BCJ Group today!