How to calculate home office expenses on your tax return

Tax season is sneaking up on us as we move toward the end of another year.

When preparing for this tax season, one question we ask ourselves is, “how can we pay less tax?”

It is important to consider what deductions you can claim against farming income in your tax return. A deduction you should always consider is home office expenses.

This does not need to be a deduction that complicates your life. By understanding what home office expenses are, what they include and how they are calculated, you can ensure you are properly deducting this expense. There are some restrictions, which are discussed below.

First, do not simply estimate your home office expense. Keep track of home office receipts and keep these with your tax filing records. The Canada Revenue Agency may ask to see these to prove your claim.

Second, you must be able to prove that the office meets one of the following conditions:

  • It is your primary place of business. You may fall outside the rules if you have an office elsewhere, such as in your shop.
  • The home office is being used exclusively for the farm — used regularly to meet chemical representatives, insurance adjusters, for example.

Generally, the percentage of your home expense you can claim is limited to the size of the space that is being used for the farm in relation to the size of your house (excluding common areas like the kitchen and bathrooms).

If the space used for the farm is determined to be 10 percent of your house, you will then be able to claim 10 percent of the total expenses related to your house.

The following are some expenses that you can include when calculating home office expense:

  • rent (if you are a tenant)
  • mortgage interest (make sure not to include the principal portion)
  • property tax
  • utilities (electricity, heat, water, etc.)
  • home insurance
  • repairs and maintenance

One thing you should be careful in considering is claiming capital cost allowance (tax depreciation) on your house. Claiming tax depreciation on your home against farm income may cause you to lose the ability to use a portion of your principal residence exemption. This exemption can save you a fair amount of tax if you sell your house in the future.

As discussed earlier, keeping track of your expenses is important. If the CRA determines that you are claiming an unreasonable amount or you are not able to provide back-up when requested, they may deny your expense claim and you will end up paying more tax than you originally anticipated.

Understanding the regulations and applying appropriate tax treatment can be difficult as tax regulations change from year to year. When claiming home office expenses in your tax return, please consult with a trusted adviser to receive the maximum benefit.

Colin Miller would like to thank Riley Honess and Shin Owaku of KPMG for their assistance with writing this article.

Colin Miller is a chartered accountant and partner with  KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca

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