Q: My wife and I farm and have a vehicle repair business on the side. For tax purposes, can I deduct some of my expenses for our house?
A: These sorts of expenses are allowable as deductions, but there are plenty of rules. You need to be cautious and ensure your deductions are genuine, as opposed to an attempt to artificially reduce your income.
If your repair business is incorporated separately, you may have to ensure the source of the deductions is either owned or rented by the company. For example, if you own your home quarter personally, but your repair company uses your shop, you may not be able to deduct the shop costs unless you can show a lease arrangement between your company and you.
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Most people have a home office. Can you deduct any home costs from the income of your business? Yes, but only if they are related. For example, if you have a separate phone line for your business, then all allowable deductions for that line are available to you, in full. But if you only have one phone line, then you need to deduct only a percentage of the total phone costs, since the line is for both business and personal use.
Ordinarily in Canada, payments for rent or mortgage on your personal residence are not tax deductible. It is only when those costs are associated with a separate, home-based business that you may be able to obtain some deductions.
The most common way to do this is to measure your home and your home office. If you own a 1,500 sq. foot house and have a 300 sq. foot office in it, you can deduct about 13 percent of some costs. If anything, I would stay conservative on this figure rather than being aggressive.
The potential deductions available would include mortgage payments, but only the interest, not the principal. You need to be careful to get your mortgage company to give you a document setting out this differential.
Property taxes may also be deductible on this proportion, as may heating and utility costs as well as internet access. Property insurance as well as costs for repair and maintenance can also, in some circumstances, be deductible.
Also, the home office has to be the principal place where you conduct business.
If you rent a big office or shopin town, you cannot always deduct these personal costs.
Remember, in Canada the deduction of personal residence expenses is the exception and not the rule.
Further, it must actually be used as a place of business and exclusively used for such. So you can’t just shove a desk and an old computer into the corner of your living room and say that’s your office. Tax authorities are looking for legitimacy.
Even if you qualify for some of these deductions, there are limits. Deductions for a home office cannot create losses.
By that, I mean your home office expenses can only be deducted to a maximum, which is the income from that particular business. This is measured before deducting the home expenses.
As with many types of deduction or loss, excess unused deductions can be carried forward and used in a subsequent year, subject to the same rules and limitations.
Even if you do not own your own business, you can claim some of these deductions if you work from home through an agreement with your employer. With more commerce being done electronically, this sort of work arrangement is becoming more popular. You will first need to get your employer to sign a form proving this arrangement, and you will have to file that form with your taxes. Then, the same basic rules set out previously will apply.
Note that Canada Revenue Agency has the right to scrutinize your returns and the information you provide. This is a complex area, and you should consult a competent accountant for advice.
Rick Danyliuk is a practising lawyer in Saskatoon with McDougall Gauley LLP. He also has experience in teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
