This blog post was prepared with the assistance of MLT Aikins LLP summer student Danielle Hopkins.
Employees working from home during the COVID-19 pandemic may be wondering whether additional costs they incur during this time will be deductible for income tax purposes.
When it comes to deducting home office expenses for income tax purposes, there are three approaches outlined in this article:
- an employee may be able to deduct these expenses from their own taxable employment income;
- an employer can provide their employees with home office allowance; and
- an employer can reimburse employees for any actual costs incurred by the employee relating to home office expenses.
Deducting Home Office Expenses
Employment expenses, such as those relating to a home office, can sometimes be claimed as a deduction on your personal income tax return. Whether the deduction can be claimed depends on a number of conditions. In addition, no deduction can be claimed if the expense was reimbursed by the employer.
In order to claim employment expenses, there are a few conditions that must be satisfied. The employer must prepare and sign a Form T2200 Declaration of Conditions of Employment form confirming that the employee was required to pay the expenses in question. Additionally, an employee must fall into one of the following categories:
- The home office space is where the employee principally does their work (generally meaning more than 50 percent of the time); or
- The home office space is used only to earn employment income, and is used on a regular and continuous basis for meeting clients, customers, or other people in the course of one’s employment duties.
Under the first category, there is some uncertainty as to how to interpret “principally”. It could be suggested that the relevant time to consider whether an employee principally does their work from their home office is an entire calendar year, meaning that an employee would have to work from their home office for at least six months of the year to qualify. However, this interpretation would mean that it would be difficult or impossible for employees who start or cease home office work partway through the year to qualify, even if it was because they changed employers. A more appropriate interpretation is that the employee must “principally” perform their employment duties in their home office space during the time period for which home office expenses are actually being claimed. Therefore, if an employee is required by an employer to work from home for five of the 12 months in a calendar year, as long as the employee “principally performs the employment duties” from the home office during those five months, he or she should be entitled to claim home office expenses for those five months.
The second category could also be difficult to satisfy in a pandemic. The CRA has traditionally considered “meeting customers” only to include face-to-face encounters. There is no indication that CRA would consider online virtual meetings and conference calls in evaluating whether an employee falls into the second category above. While some Informal Procedure Tax Court of Canada cases have held that “meeting customers” could include meetings held by phone, these decisions have not influenced the CRA to change its policy.
Home Office Allowances and Reimbursements
As an alternative option, an employer could provide a technology allowance or a reimbursement of technology expenses to help employees work from home during the pandemic. An allowance is typically a lump sum amount paid to an employee for a specific purpose that is not based on actual cost and results in a taxable benefit to the employee. In contrast, a reimbursement is generally a repayment to the employee of an expense incurred by the employee in the course of their employment duties and normally would not result in a taxable benefit. However, if the reimbursement is considered by CRA to be a reimbursement for personal expenses, such as upgrading home computer equipment or buying a webcam, it could also be considered a taxable benefit.
In response to the COVID-19 pandemic and corresponding increase in the number of employees working remotely, the CRA has recently stated that they will not consider a reimbursement of up to $500 for purchases such as personal computer equipment that allow employees to work from home to constitute a taxable benefit. These purchases must principally be for the employer’s benefit and must be supported by an invoice.
An employee who receives an allowance from their employer that is considered to be a taxable benefit may be able to claim certain employment expenses to offset that allowance if the employee was required to incur these employment expenses under their contract of employment and the employer certifies this by completing a T2200 form and provides it to the employee.
Where an employer reimburses an employee for the actual cost of expenses incurred during the course of their employment, an employee cannot “double-dip” by claiming those expenses as a deduction on their personal income tax return as well.
- There is still uncertainty as to whether the Canada Revenue Agency will introduce new rules to adjust the criteria for deduction of additional home office expenses incurred because of the COVID-19 pandemic. Unless changes are made, employees should not assume that home office expenses or purchases related to remote work will always be deductible.
- CRA has said that a reimbursement from an employer of up to $500 will not be considered a taxable benefit if it is to purchase personal computer equipment that enables employees to work from home. The purchase must primarily be for the employer’s benefit, and must be supported by an invoice.
- Employees should keep track of expenses associated with their home office in case they end up qualifying under the current rules or if the government implements new rules permitting COVID-19-related home office expenses.
- Employees who are required by their employer to utilize a home office or incur other employment-related expenses should ensure that their employer prepares and signs a Form T2200 Declaration of Conditions of Employment, where the employer certifies that such expenses were required to be incurred by the employee as a condition of their employment.
This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.