It is never too early to start preparing for next year’s tax season. One question that should always be asked is, “how can I pay less tax?”
It is important to consider what deductions can be claimed against farming income on a tax return. One of the deductions that should always be considered is a home office expense.
This does not need to be a deduction that complicates your life. By understanding what home office expenses are, what they comprise and how they are calculated, it’s possible to ensure that this expense is properly deducted.
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First, do not simply estimate home office expense. Keep track of home office receipts and keep these with the tax filing records. The Canada Revenue Agency may ask to see these receipts to prove a claim.
Second, it’s important to be able to prove that the office meets one of the following conditions:
It is a primary place of business. You may fall offside if you have an office elsewhere, such as your shop.
The home office is being used exclusively for the farm, such as regular meetings with chemical representatives and insurance adjusters.
To calculate the portion that can be deducted, it’s important to use a reasonable basis. Generally, the percentage of a home expense that can be claimed is limited to the size of the space that is being used for the farm in relation to the size of the house, excluding common areas such as the kitchen and bathrooms.
If the space used for the farm is determined to be 10 per cent of a house, 10 per cent of the total expenses related to the house can be claimed.
Alternatively, calculate the number of hours in the day that are used the home for farming business and then divide that amount by 24 hours. Then multiply this result by the business part of the total home expenses, which would give the household cost that can be deducted.
If the business is run for only part of the week or year, the claim would be reduced accordingly.
The following are expenses that can be included when calculating home office expense:
• rent (if you are a tenant)
• mortgage interest (make sure not to include the principal portion)
• property tax
• utilities (heat, electricity, water)
• home insurance
• repairs and maintenance
• home internet access fees
Claiming capital cost allowance (tax depreciation) on the house against farm income should be done with caution because it may result in losing the ability to use a portion of the principal residence exemption. This exemption can save a fair amount of tax if the home is sold in the future.
Finally, the amount that can be deducted for business-use-of-home expenses cannot be more than the net income from the business before these expenses are deducted.
Business-use-of-home expenses cannot be used to create a farming loss. It will still be important to calculate this expense every year because the unused deduction can be carried forward and deducted in the following year.
As discussed earlier, keeping track of expenses is important. If the CRA determines that an unreasonable amount is being claimed or receipts cannot be provided when requested, it may deny the expense claim and you will end up paying more tax than originally anticipated.
When claiming home office expenses in a tax return, please ensure to consult with a trusted adviser to receive the maximum benefit from this deduction.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. He would like to thank Karrie Geremia and Alex Barthel of KPMG for their assistance with writing this article.
