Home Office Expenses incurred during COVID-19: Can an Employee Deduct Them?

Since the COVID-19 pandemic began, many businesses have required their employees to work from home. Such employees have created work spaces in their homes from which they now carry out their employment functions. As well, many have made investments in home office supplies and equipment. Some of the expenses relating to an employee’s home office may be deducted from their salary for the 2020 tax year provided certain criteria are met, and employers may assist their employees in meeting these criteria.

Summary

  1. Subject to meeting certain conditions, an employee can deduct from employment income home office rent and the cost of supplies that are consumed directly in the performance of employment duties (“Home Office Expenses”) if these outlays by the employee were required by the contract of employment.

  2. The CRA has stated that a “tacit” understanding between the employee and employer—that such payment was to be made and was, in fact, necessary under the circumstances to fulfill the duties of employment—may suffice.

  3. The principal condition for the deduction of expenses in respect of a work space at home, such as rent, utilities, and maintenance costs (“Office Space Expenses”) is that the employee must principally perform (i.e. more than 50% of) her work from that work space. The “principally performs” requirement will generally be met where an employee works from home more than 6 months of the calendar year, and will likely be met where an employee works from home more than 50% of the time in the period during which the employee is required to work from home (e.g. during the COVID-19 lockdown). There is no similar “principally performs” requirement for expenses which are not in respect of a work space at home such as stationery items and long-distance telephone calls (“Supplies”).

  1. To claim a deduction for Home Office Expenses, the employee must file a Form T2200 with the employee’s personal tax return. A Form T2200 is signed by the employer and certifies that the employee's contract requires the employee to incur such expenses while carrying out the duties of employment. 

  1. If an employee is entitled to deduct Home Office Expenses from employment income, she may be able to obtain a rebate of the GST or HST paid on these expenses.

  2. The CRA has stated that in the context of COVID-19, an employer may reimburse an employee for the purchase of personal computer equipment up to $500, and such reimbursement will not be a taxable benefit for the employee.

Analysis

Under the Income Tax Act (“ITA”), an employee can deduct from employment income the reasonable cost of rent and of the supplies the employee consumes in performing employment duties, provided the employee is required by the contract of employment to supply and pay for such expenses, and the employee has not been nor is entitled to be reimbursed for such expenses.[1]  In addition, to deduct Office Space Expenses, the employee’s work space at home must be the place where the employee principally performs her duties.[2]  

1.             “Required by the Contract of Employment”

An employee may deduct Home Office Expenses only if the employee is “required by the contract of employment” to supply and/or pay for them.[3] It is helpful if this requirement is expressly contained within the employee’s contract with her employer, but it does not need to be; this requirement may be an implied condition of employment.[4] The CRA has stated that a “tacit” understanding between the employee and employer—that such payment was to be made and was, in fact, necessary under the circumstances to fulfill the duties of employment—may suffice.[5]

The CRA has also stated that under a “formal telework arrangement”, even one entered into voluntarily, the employee is required to provide a work space in her home and pay for some additional costs associated with providing this work space.[6] Accordingly, under such an arrangement the employee should meet the condition of being “required by the contract of employment” to supply and pay for a home office.

If a business has asked its employees to work from home during the COVID-19 pandemic, this resembles a “formal telework arrangement” such as the one that the CRA has indicated as requiring an employee to provide a work space (above). Under such an arrangement, the employee must provide a work space in her home and incur Office Space Expenses. A written directive from an employer to its employees to work from home would help to meet this requirement.

2.            Office Space Expenses

The principal condition for the deduction of Office Space Expenses is that the employee must principally perform (i.e. more than 50%) her work from that work space.

(a)          “Principally Performs”

The “principally performs” requirement is a key issue in temporary COVID-19 work-from-home arrangements.

The availability of a deduction for Office Space Expenses by an employee is limited by the requirement that the employee’s work space must be the place where she “principally performs” her duties of employment.[7] “Principally” generally means more than 50% of the time.[8]

It is not altogether clear what period of time should be used to test the “principally performs” requirement. The CRA has stated that “the number of hours that the employee is required to work under the terms of his or her employment contract” should be used to determine whether during more than 50% of that time, the employee is performing her duties from home, and that these hours may be impacted by overtime or different working hours.[9]  For a full-time salaried employee, this may mean all the hours the employee worked in the calendar year are to be used to determine whether during more than 50% of those hours the employee performed her duties of employment from home.[10] In other words, a full-time salaried employee may need to work from home for an aggregate of more than 6 months in a calendar year for this requirement to be met. However, the CRA has also stated that “in circumstances where an employee satisfies the eligibility criteria for a portion of the year, a reasonable claim in respect of that portion will be permitted.” [11]  As such, it may also be possible that “more than 50% of the time” refers to the period of time during which the employee is required by her contract of employment to work from home. In that case, an employee will be required to perform her duties of employment from home more than 50% of the time during that period in order to meet the “principally performs” requirement. Revenue Quebec has said that this test is met in the current context, and they are applying a near-identical provision in Quebec’s Taxation Act.[12]

Many businesses implemented a work-from-home mandate around mid-March. Under these mandates, many employees were required to work from home on a full-time basis starting on a certain date during that time and have continued to do so up until now. It is uncertain how long these mandates will continue, and it is possible that employees may start to return to the office in a staggered fashion as the threat diminishes. For an employee who does not work from home for an aggregate of more than 6 months in a calendar year to be eligible to deduct her Office Space Expenses, the latter test—being the one that measures the requirement with reference to the period of time during which an employee is required by her contract of employment to work from home—is likely the correct one. However, the issue is not free of doubt, and it would be of assistance if the CRA provides further guidance on this question.

If the “principally performs” requirement is met, any Office Space Expenses that are otherwise eligible to be deducted (as discussed below) may not exceed the employee’s income from employment for the year.[13]

(b)          What constitutes Office Space Expenses?

If the above requirements are met, an employee may be permitted to deduct rent and certain other expenses in respect of her work space. An employee who rents the home in which her work space is located may deduct a reasonable portion of the rent.[14] On the other hand, an employee who owns her home cannot deduct any of the following: (i) the rental value of her work space; (ii) capital cost allowance; (iii) mortgage interest; (iv) property taxes; or (v) insurance costs.[15] However, both an employee who rents and an employee who owns her home, may deduct a reasonable portion of the cost of gas, electricity, lightbulbs, cleaning materials and minor repairs.[16]

In determining the amount of certain costs that can be deducted, generally both the proportion of the total time that the space is used for work and the proportion of the home that the work space occupies must be considered. If the costs are associated exclusively with the space used for work, then this rule does not apply. But if the space is used partly as an office and partly as a video game room, for instance, then such division must be accounted for in apportioning the expenses.[17] For example, if the office space accounts for 25% of the employee’s home's total surface area and the employee uses the office space 80% of the time for employment activities, the employee may deduct 20% (25% x 80%) of the supplies used in the home and 20% of the employee’s rent.[18]

3.            “Supplies”

“Supplies” refers to materials that are “used up” directly, and that “play an integral and essential part”, in the performance of employment duties.[19] Any capital expenditures (e.g., office equipment) may not be deducted. For example, “supplies” may include stationary items, stamps, toner, ink cartridges, street maps, and directories, but does not include briefcases, calculators, or a computer.[20]

Long-distance telephone calls and cellular minutes that reasonably relate to the earning of employment income are deductible as supplies consumed.[21] However, an employee may not deduct the monthly service charge for a phone line, under a cellular contract, or for internet access. Rather, an employee may only deduct that portion of her bill that was used for employment-related phones calls.

In the CRA’s view, internet access fees and a second telephone line represent fixed costs, which cannot be directly related to the use made in the performance of the duties of employment.[22] With respect to cellular phone contracts, the CRA is of the view that because service providers provide a detailed breakdown of how the minutes under a cell contract are used, but do not do the same for cellular data, an employee would only be able to substantiate the proportion of cellular minutes that were used for employment purposes but not be able to substantiate the same for data.[23]

The CRA has stated that, if the employee can establish that the cellular phone was used exclusively for employment purposes, the employee can deduct the service charge, but it has not made this concession in respect of second phone lines or internet access plans.[24] Revenue Quebec has stated that internet fees may be deducted, provided that they are billed according to the employee’s use.[25]

4.            Form T2200 – Declaration of Conditions of Employment

An employee wishing to deduct Home Office Expenses must have a Form T2200 (Declaration of Conditions of Employment) signed by her employer.[26] The portions of Form T2200 relevant for these purposes specifies:

  1. that the employee's contract of employment required her to pay her own expenses while carrying out her the duties of employment;
  2. whether there was any allowance or reimbursement for such expenses;
  • whether the employee's contract of employment required her to use a portion of her home for work (and the percentage).

Employers may assist their employees by advising them of the requirement to file Form T2200. Employers should only complete a Form T2200 in situations where they have reasonable grounds to make the claims made therein and there is an express or implied requirement in the employment contract for the employee to work at home and/or pay the particular employment expenses in question.[27] Form T2200 does not require the employer to certify that the employee’s work space at home is the place where she “principally performs” her duties of employment.[28]

Note that an employee who resides in Quebec and desires to deduct her expenses under the similar provisions contained in the Quebec Taxation Act is required to file a form under that legislation, separately.[29] Revenue Quebec requires an employee to submit a certification by the Employer (a TP-64.3-V, General Employment Conditions) and an accounting of the expenses by the Employee (TP-59-V, Employment Expenses of Salaried Employees and Employees Who Earn Commissions, or a detailed statement of your expenses.)[30]

5.            GST/HST Rebate on Deducted Expenses

If an employee is entitled to deduct Home Office Expenses from her employment income, she may be able to obtain a rebate of the GST or HST paid on these expenses.[31] She can apply for the rebate by completing Form GST370, Employee and Partner GST/HST Rebate Application, and claiming the rebate on line 45700 of her income tax return. An employee who receives a GST/HST rebate for such expenses must include the rebate in her income for the year she received it.

An employee may qualify for a GST/HST rebate if the employee paid GST or HST on certain employment-related expenses, deducted those expenses on her income tax return, and the employer is a GST/HST registrant. The employer cannot be a listed financial institution as defined in Part IX of the Excise Tax Act.[32]

6.            Reimbursements & Allowances

Employers may instead compensate their employees for the expenses they incur while working from home. They may do so by providing a flat-rate allowance, or by reimbursing their employees based on itemized receipts.

An allowance received by an employee to cover a portion of her Office Space Expenses would be considered a taxable benefit regardless of whether the employee could deduct the Office Space Expenses.[33]

A reimbursement received by an employee, based on receipts which the employee has submitted to the employer, for Supplies purchased by the employee would not generally be considered a taxable benefit. The rule is that as long the costs are necessary in order that the employee carry out her duties of employment, the employee would not be considered to have received a taxable benefit.[34] However, where the expense has both a personal and a business component, or is of a mixed character, there must be a reasonable allocation based on the ratio of business to personal use.[35] The portion allocated as personal would be a taxable benefit and the employer would be required to report and withhold on the taxable portion of the payment.

On the other hand, a reimbursement received by an employee for the purchase of home office equipment (such as office furniture or computer equipment), would generally be a taxable benefit. This is because when a reimbursement by an employer relates to an asset purchased and owned by an employee, the employee benefits from the assistance.[36] However, the CRA has acknowledged that the declaration of a state of emergency in Canada due to COVID-19 has precipitated teleworking for a number of employees who do not have the necessary computer equipment to do so. [37] In this context, the CRA stated that an employer’s reimbursement of an employee’s purchase of personal computer equipment to perform her work immediately and properly, up to an amount of $500 and on the presentation of a receipt, will not result in a taxable benefit to the employee because such reimbursement mainly benefits the employer.[38]

 

***

[1] Income Tax Act, RSC, 1985, c 1 (5th Supp), s 8(1)(i)(ii), (iii). Canada Revenue Agency (“CRA”), Interpretation Bulletin IT-352R2 “Employee's Expenses, Including Work Space in Home Expenses” (August 26, 1994).

[2] ITA, ibid, s 8(13).

[3] Ibid, s 8(1)(i)(ii) and (iii).

[4] In CRA, Views Doc 9230748 (November 9, 1992), the CRA based its position on the jurisprudence, which it summarized as holding that: “1. a requirement need not be in expressly written in the contract of employment if it was implicit in the terms and conditions necessary to perform the duties of employment and 2. a requirement would be an implied condition of employment even if the employee’s failure to comply did not result in dismissal but merely to adverse consequences to the employee such as an unfavourable performance review.”

[5] IT-352R2, supra note 1 at para 1.

[6] CRA, Views Doc 2011-0394321E5 (March 1, 2011).

[7] ITA, supra note 1, s 8(13)(a)(i). Subparagraph 8(13)(a)(ii) sets out an alternative requirement that the work space must be “used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment”. The CRA has historically taken the position that these meetings must be in person (2013-0481171E5). In light of the current “physical distancing” protocols, the CRA may revise its policy, but has not suggested to date that it will do so.

[8] IT-352R2, supra note 1 at para 1.

[9] CRA, Views Doc 2007-0227511E5 (December 13, 2007).

[10] In the Tax Executives Institute/CRA Income Tax Liaison Meeting (December 7, 2010), the TEI asked the following question of the CRA: “Question 10 of current Form T2200… requests information on the percentage of the “workday” that an employee works at his/her home office… The reference to workday on the Form is undefined and implies that the employee must work principally at home for not less than 50 percent of each work day in order to be able to deduct home office expenses. Since the reporting period for individuals is a calendar year, we believe that home office expenses should be deductible if an employee is required to maintain a home office and uses the home office for not less than 50 percent of his or her work time during the tax year regardless of whether that office is used daily. Thus, for example, an employee should be able to qualify for a home office expense deduction where he/she works in that office more than two-and-a-half days per week or two to three weeks per month on average. … Would CRA confirm that employees are not required to test whether they have used the home office for not less than 50 percent of every work day during a tax year? If so, would CRA modify question 10 of Form T2200?” Note that the most recent Form T2200 asks, “approximately what percentage of the employee's duties of employment were performed at their home office?”.

[11] CRA, Views Doc 9620507 (September 20, 1996), in which an employee who went on disability leave was permitted to deduct expenses for the portion of the year that he was able to work. The CRA said, “it is our view that the condition described in subparagraph 8(13)(a)(i) of the Act was satisfied for the use of the work space in his home for that period of time… when [he] was not on disability leave.”

[12] Revenue Quebec, “COVID-19: FAQ for Individuals” (last updated: May 5, 2020) <https://www.revenuquebec.ca/en/coronavirus-disease-covid-19/faq-for-individuals>; Taxation Act, CQLR c I-3, s 62.1.

[13] ITA, supra note 1, s 8(13)(b).

[14] Ibid, s 8(1)(i)(ii); IT-352R2, supra note 1 at para 5.

[15] IT-352R2, ibid at para 1 and 5; Horbay v R, [2003] 2 CTC 2248; Lester v R, 2011 TCC 543; CRA, Views Doc 2000-0022015 (May 17, 2000).

[16] IT-352R2, ibid at para 5.

[17] Ibid at para 7.

[18] Revenue Quebec, supra note 12.

[19] ITA, supra note 1, s 8(1)(i)(iii); IT-352R2, ibid at para 9; CRA, Views Doc 2015-0603631I7 (July 19, 2016).

[20] CRA, Guide T4044: Employment Expenses (2019).

[21] CRA, Views Doc 2016-0634351E5 (August 22, 2016).

[22] CRA, Views Doc 2009-0317611E5 (January 5, 2010).

[23] Ibid.

[24] Ibid; 2016-0634351E5, supra note 21.

[25] Revenue Quebec, supra note 12.

[26] ITA, supra note 1, s 8(10).

[27] CRA, Views Doc 2008-0276151E5 (September 26, 2008).

[28] 9620507, supra note 11.

[29] Taxation Act, supra note 12, s 78.

[30] Revenue Canada, supra note 12.

[31] Guide T4044, supra note 20.

[32] RSC, 1985, c E-15.

[33] CRA, Views Doc 2011-0402581I7 (July 12, 2011).

[34] CRA, Views Doc 9511195 (August 10, 1995).

[35] Ibid; ITA, supra note 1, s 6(1)(a).

[36] CRA, Views Doc 2011-0399171E5 (June 8, 2011).

[37] CRA, Views Doc 2020-0845431C6 (April 22, 2020).

[38] Ibid.

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