Could home quarantine mean home office tax deductions?

By

EY Canada

Multidisciplinary professional services organization

7 minute read 17 Apr 2020
Related topics Workforce Tax planning Tax

If you’re now working from home, will your extra costs be deductible?

By David Robertson and Laura Jochimski, EY Law

If you’re taking on extra expenses while you’re mandated to work from home during the COVID-19 pandemic, should you be allowed to deduct those amounts for income tax purposes? Office expenses —things like rent, electricity and stationery — incurred by employers are deductible business expenses, so with physical isolating requiring thousands of employees to work remotely from home, shouldn’t employees get to deduct these expenses as well?

In short, can employees deduct the cost of a new desk or chair from their income tax? No. What about part of their rent? Maybe. Will the government bring in new rules to clearly allow deductions of employee expenses like desks, extra computer monitors and rent during the COVID-19 pandemic? We will have to wait and see.

Subsection 8(2) of the Income Tax Act contains a general rule that, unless an expense is expressly permitted by section 8, it’s not deductible in determining a taxpayer’s employment income.

Subsection 8(1) lists very specific, limited circumstances under which expenses can be deducted in determining a person’s employment income. With respect to home office expenses, subparagraphs 8(1)(i)(ii) and (iii) allow an employee to deduct office rent and the cost of supplies consumed directly in the performance of the employee’s duties of employment.

Put simply, this has been interpreted as allowing the deduction of a reasonable amount of rent that is proportional to the space of the home used for work and any supplies that are expendable — such as pens, paper and other items. If the employee owns their own home, however, there is no provision that permits any mortgage interest to be deductible.

But even with expenses that are within the scope of subparagraphs 8(1)(i)(ii) or (iii), there are further restrictions.

First, the employee’s obligation to personally pay for the office rent or supplies must be specifically required under their contract of employment. To prove this, the employee must have their employer sign and provide a Form T2200, Declaration of Conditions of Employment, before they can deduct the expense.

Second, once an expense like electricity bills or rent meet the criteria under subsection 8(1), there are further limiting rules under 8(13). In particular, for an eligible expense to be deductible, the work space must be either: (a) the employee’s principal place of employment, or (b) used by the employee exclusively for the purpose of earning income from employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of employment.

Given that many employees are now being required by their employers to work from home and are abiding by the government’s request to self-quarantine and avoid personal contact with others, the issue arises as to whether online virtual meetings and conference calls can cause an employee’s home office to be viewed as a place where that employee regularly meets customers (keeping in mind that the home office must be used “exclusively” for the purpose of earning income from employment). In the past, the CRA has taken the position that virtual/skype meetings and conference calls do not count as meetings.

In light of how the current pandemic is causing the location of work to rapidly change, however, we suspect it will only be a matter of time before the Tax Court is called upon to express its views.

In regards to whether or not the work space is the place where an employee “principally performs” his or her work duties, there is no guidance on how this performance is calculated, and it’s not clear if a short (e.g., one- or two-month) stint of mandatory work from home would qualify, or if the performance is evaluated on an annual basis.

As more and more employers are moving towards “hotelling,” where employees no longer have an assigned space at the employer’s office — and there may in fact be more employees than available workspaces on a given day — many employees have already been working at least part time from home. As a consequence, even if measured on an annual basis, with the ability to work remotely accelerating, more and more employees will be working more than 50% of their time from home rather than at their employer’s office.

If an expense is deductible by an employee in determining their taxable income for income tax purposes, there’s also corresponding GST/HST relief. In particular, section 253 of the Excise Tax Act provides a rebate to certain employees for the GST/HST paid on expenses that are deductible in computing the employee's income from employment under the Income Tax Act.

An alternative approach: employer-paid home office allowances

Instead of requiring an employee to incur home office expenses as a condition of their employment, some employers prefer to provide an allowance to their employees who are required to work from home in order to cover the additional costs incurred by their employee.

This has a number of advantages.

First, the allowance is deductible by the employer in determining their taxable income, provided it is a reasonable amount.

Second, provided the allowance is paid to cover items that are subject to GST/HST — like telephone and internet charges or office supplies — as opposed to non-taxable items like apartment rent, the employer is entitled to recover a portion of the allowance as an input tax credit (assuming the employer is engaged in selling GST/HST-taxable goods and services).

So, for example, if a $100 allowance is paid to an employee in Ontario for office supplies, the employer could be entitled to an input tax credit of $11.50 in respect of the notional HST included in the $100 allowance (i.e. $100 x 13/113). So for the employer, the $100 allowance would actually cost only $88.50.

In light of the pandemic, it will be interesting to see if the CRA, Finance Canada and the government take steps to help employees who are not reimbursed by expanding or relaxing the current employee expense deductibility rules or how they are administered. In the meantime, let’s look at the takeaways:

Top five considerations for the current situation

  1. The rules allow deductions for certain home office expenses if you are required by your employment contract to work from home and you “principally perform” work duties there. In the past, the CRA has said this is a 50% threshold, but it has not said if that is 50% of a year (i.e., 6 months) or if a short stint during which you are required to work from home 100% of the time would qualify, like in this pandemic situation.
  2. Deductions under the current rules in section 8 of the Income Tax Act are restricted. The cost of items like furniture and computer equipment cannot be deducted (nor can a portion be claimed as deductible depreciation). But things that are expendable — including office supplies, long distance phone calls, heating bills, and a portion of your rent related to the home office — can be deducted if it’s a condition of your employment and your employer certifies that fact by providing you with a T2200.
  3. There’s no double-dipping. You can't get a deduction if your employer is already covering these expenses either by reimbursing you directly or by providing you with a reasonable allowance.
  4. Keep track of your expenses. Having a paper trail of expenses incurred is essential to prove the expenses were incurred under current rules — or if the government implements new rules to permit COVID-19-specific home-office deductions. Either way, be diligent and save any receipts associated with your required work from home stint.
  5. Talk to your employer about filling out the CRA form (T2200) required to deduct home-office expenses.

To learn more about EY Law, visit eylaw.ca.

This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

Summary

In light of the pandemic, it will be interesting to see if the CRA, Finance Canada and the government take steps to help employees who are not reimbursed by expanding or relaxing the current employee expense deductibility rules or how they are administered.

About this article

By

EY Canada

Multidisciplinary professional services organization

Related topics Workforce Tax planning Tax