Working From Home And Your Taxes: Here’s What You Need To Know
Does working from home have an impact on your taxes? Here is Mark Faris, CEO & Broker, and Aaron Rumley, CPA, providing some great insight into that and other homeownership tax-related questions.
Q: I work from home now due to Covid-19. Can I claim my home office in next year’s income tax?
A: Because of the unique circumstances surrounding the Covid-19 issues, even employees that would not normally qualify to deduct home office expenses, may now qualify. The CRA imposes the following conditions on expenses related to workspaces in the home:
- The workspace is where you mainly (and CRA have indicated this is more than 50% of the time) do your work. -so for most, due to Covid-19, this would not be hard to meet
- You use the workspace only to earn your employment income, and you use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties. (This could include virtual meetings, conference calls, etc.)
It’s important to note that home office expenses that are deductible for tax purposes would include only the proportion of expenses related to your home that is equal to the amount of space that the office takes up within your home (for example, how many square feet the office is out of the total size of your home). This would make a portion of your property tax bill, and other utility and maintenance costs, deductible as well.
For those employees that are not self-employed, they would require a T2200 (Declaration of Conditions of Employment) which outlines the specific conditions of their employment — specifically the need to have a home office.
Q: What can I write off for tax purposes if I turn my primary residence into a rental property?
There are some important things to note when an individual is contemplating doing this. First, you don’t have to pay tax on any accrued gain, however, you must report the sale and designation of the principal residence on Schedule 3 of your return to be eligible for the Principal Residence Exemption. Here you will need to report basic information such as the date of acquisition of the residence, a description of the property and the proceeds of disposition.
The good news, however, is that when you change your principal residence to a rental property, you may be able to make a special tax election [subsection 45(2)] not to be considered as having started to use your principal residence as a rental property and thus, you can avoid reporting this gain in the year of the change in use.
If you make this election, however, you can’t claim any tax depreciation — known as capital cost allowance (CCA) — on the property, and you still need to report the net rental income you earn each year.
While your election is in effect, you can designate the property as your principal residence for up to four years, even if you don’t use your property as your principal residence; however, you can only do this if you don’t designate any other property, such as a vacation home or cottage, as your principal residence during this period of time.
If you make this election and then move back into your residence, there are no immediate tax consequences as a result of moving back.
During this period, aside from the capital cost allowance, you are able to deduct all other expenses related to the earning of rental income from the property, including mortgage interest. It’s also important to keep in mind that any repairs that are capital in nature, meaning this improves or extends the life of the property, can only be capitalized and not expensed in the year. This would include items such as replacing windows, roofs, etc.
If you have any accounting questions you can direct message Aaron Rumley or find more information here:
Rumley Holmes LLP
For any real estate related questions, please reach out to us at Faris Team – we’re here to help.