Employee home office expenses: Special rules for 2020 claims

Update on home office expenses and form T2200

The CRA has responded to us on a number of outstanding questions relating to home office expenses. Here is our latest update:

Claiming home internet access fees

One common question that has arisen is how to calculate the amount of internet access fees that relate to employment. The CRA’s calculator prorates these costs based on the workspace percentage.

The CRA has confirmed that if an employee wants to use a different method to calculate the employment-use portion of their home internet access fees, they must ensure to meet all the following conditions:

• the cost of the internet plan is reasonable
• the cost of the internet plan has been divided between employment and personal use on a reasonable basis
• the employee is able to substantiate the amount of data used directly in the performance of their employment duties

The employee should include the employment-use portion of the fees calculated under “other expenses” on line 9270 of the T777 or T777S forms. In addition, if using the online calculator, the home internet fees should not be included in the box “Total electricity, heat, water and home internet access fees you paid from” as this total number will be prorated by the workspace at home allocation. As with all other expenses claimed, employees should ensure they maintain appropriate supporting documentation.

Adult child working at parents’ home

The CRA’s website indicates that multiple family members can use the temporary flat rate approach. Given this was unclear, a common situation we asked the CRA to clarify is under what circumstances an adult child living and working at their parent’s home, who meets the pandemic eligibility criteria, can claim a deduction.

In the case of the temporary flat rate method, the CRA recently updated their FAQs, indicating that each employee working from home who has paid home office expenses and meets the eligibility criteria can use the temporary flat rate method to calculate their deduction for home office expenses. As the detailed method is based on expenses actually paid by the person, that means that no amount can be claimed under either method if a child is working at home but does not pay for expenses related to the home

In situations where an adult child is working from a workspace in their parents’ home and pays an amount to that parent, the amount will only be considered rent for purposes of subparagraph 8(1)(i)(ii) if the amount was paid for the use of the workspace and the arrangement constitutes a landlord/tenant relationship. Further, the amount so paid must be reasonable in the circumstances. Absent the existence of a landlord/tenant relationship, the amount paid by an adult child in these circumstances would not be considered rent and therefore, no deduction can be claimed under either method.

Interaction with CRA’s $500 reimbursement policy for home office equipment

Many employers are paying reimbursements and have taken advantage of the CRA’s temporary reimbursement policy on home office equipment in 2020. For many employers, some of the costs will be for supplies (which would not create a benefit if consumed for work) and others will be for equipment such as desks, monitors, chairs, etc., which are not deductible as employment expenses.

We asked the CRA to confirm that reimbursements solely for home office equipment are not a reimbursement for the purposes of question 2 on Form T2200S.

The CRA has confirmed that if the employer is reimbursed for the purchase of office or computer equipment, all of which are expenses that are NOT eligible to be claimed by the employee as employment expenses, they should indicate “No” for question 2 “Did you or will you reimburse this employee for any of their home office expenses?” on the Declaration of Conditions of Employment for Working at Home Due to COVID-19 (Form T2200S).

Reimbursements of home office supplies

Many employers have reimbursed employees for office supplies and other costs, and in some cases, only to a limit.  On the T777S, the CRA states that “You cannot claim any expenses that were or will be reimbursed by your employer.” We asked the CRA to confirm that a deduction can be claimed when the expense was not fully reimbursed.

The CRA has confirmed that the employee cannot claim any expenses that were or will be reimbursed by the employer. However, they can claim the portion of the eligible expenses that were not reimbursed.

We note that the CRA’s calculator and form T777S does not address this situation, so the amount net of reimbursements should be entered.

Calculating the utilities portion of condo maintenance fees

We highlighted to the CRA that calculating the utility portion of maintenance fees will be difficult for most taxpayers as they will need to obtain and extract information from the condo corporation’s financial statements. To assist with this, the CRA has indicated to us that they will accept that the administrator of the condominium building provides the information from either the current or previous fiscal year, whichever is available at the time of the request.

ORIGINAL BLOG

January 28, 2021

Home office expense claims can be complicated, and with such high volumes of new claims expected due to the increase in people working from home, CPA Canada offered the CRA ideas on ways to help ease the process for employees, employers and the government alike.

We suggested the CRA could do this by:

• adopting a simplified set of rules to help employees claim home office expenses
• relieving the burden on employers by streamlining the process for providing T2200 Declaration of Conditions of Employment forms to their employees

The CRA has acted on both counts.

For 2020 only, the CRA is allowing employees to deduct their home office expenses using a temporary flat rate method if conditions are met. Employers do not have to produce T2200 forms for employees who choose to use the flat rate method. Alternatively, employees can choose to use the detailed method, which would allow them to deduct actual home office expenses paid. Under the detailed method, employers can provide a special short Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19, as long as the pandemic caused the remote work arrangement.

The CRA also simplified the conditions for making claims under both methods.

In this blog, we highlight the key rules and considerations for making these claims. Topics include:

• overview of the tax rules for home office expenses
• new temporary home office expense claims process
• T2200 considerations for employers

We have also raised a number of questions and issues for the CRA to consider. We will provide updates on this page as the CRA responds.

Overview of tax rules for home office expenses

Under normal circumstances, employees who want to deduct their home office expenses must meet two main conditions.

First, an employee must be required by their contract of employment to maintain a workspace in their home and pay for the related expenses. Employers attest to this requirement on T2200 forms issued to their employees, and employees are only eligible to claim a deduction if they have this form in hand.

Second, the use of the workspace must meet one of two conditions:

• the workspace is where the employee “principally” (more than 50 per cent of the time) performs the duties of their office or employment
• the employee uses the workspace exclusively for earning employment income and for regularly and continuously meeting customers or clients while doing their work

These rules have not changed. The changes introduced by CRA are administrative concessions to these rules. Employees who worked at home before the pandemic should follow the detailed method for claiming a deduction for 2020.

New temporary claim methods for home office expense

For employees who worked at home during 2020 due to the pandemic, the CRA has temporarily simplified the process by:

• relaxing the employment contract requirement and providing a simplified definition of what working principally from home means in a pandemic
• allowing employees to claim a temporary flat rate deduction for 2020 if conditions are met, instead of using the detailed calculation
• providing extensive online tools, forms and guidance to help employees claim the deduction

The eligibility criteria and calculations for the detailed and flat rate methods are slightly different, as we discuss in the next two sections.

Temporary flat rate method: Eligibility criteria and calculations

Under the temporary flat rate method, employees qualify for a 2020 deduction if they meet all of the following conditions:

• worked from home in 2020 due to the pandemic
• worked from home more than 50 per cent of the time for at least four consecutive weeks in that year
• claim home office expenses only and no other employment expenses
• were not fully reimbursed by their employer for all of their home office expenses

The temporary flat rate method allows eligible employees to claim a deduction of $2 for each day they worked at home in 2020 due to COVID-19, up to $400. The amount is a substitute for actual home office expenses paid by the employee, such as rent, electricity, home internet access fees, office supplies (e.g., pens, paper) and unreimbursed cell phone costs.

Other points to keep in mind:

• an employee can qualify even if it was their own choice to work at home because of the pandemic
• employees who want to claim other employment expenses, such as employment-related auto expenses, must use the detailed method
• an employee who was reimbursed for some but not all of their expenses can use the flat rate method as long as they meet the other conditions
• the number of days worked at home due to the pandemic includes both full-time and part-time days but not days off (whether for vacation, illness or another reason)

Although the deduction is limited, the temporary flat rate method has some advantages:

• employees choosing the temporary method do not need to have their employers complete and sign a Form T2200 or T2200S, although they should do their best to document how many days they worked at home
• they do not need to determine and summarize eligible costs, or keep receipts

Employees must use the Form T777S, “Statement of Employment Expenses for Working at Home Due to COVID-19” to report that they are using the flat rate method and calculate their deduction.

Detailed method: Eligibility criteria and calculations

Under the detailed method, employees can claim the employment portion of actual home office expenses paid. Although the rules for 2020 are simplified, the calculations are essentially the same as for employees who are required to work at home more generally.

Under the detailed method, employees qualify for the deduction if they meet all of the following conditions:

• worked from home in 2020 due to the pandemic or were required to work at home by their employer
• were required to pay for expenses related to their home workspace and used the expenses directly in their work
• either:
  • worked in their home workspace “mainly” (more than 50 per cent of the time) for at least four consecutive weeks, or
  • only used their workspace to earn employment income, in particular, for regularly and continually meeting clients, customers or other people while doing their work
• have received a signed T2200 or T2200S form from their employer

The CRA has confirmed the employer’s requirement for an employee to work from home may be a written or verbal agreement. It does not have to be part of the employment contract. In addition, where an employee could choose whether to work from home due to COVID-19, the CRA still considers them to have worked from home due to the pandemic.

Qualifying employees using the detailed method must first determine the total of their eligible expenses overall. They must then prorate these expenses (excluding office supplies) based on the portion of their home used for employment, as we discuss in the next section.

Determining the percentage of workspace at home

To claim the employment portion of actual amounts paid, employees need to determine the portion of their home used for work based on both size and use (employment versus personal). For common areas, such as a kitchen table, the proration needs to account for both the floor space used for employment and the time spent.

If a specific space is used only for employment, employees will only need to prorate based on the amount of that space. The CRA provides plenty of examples and guidance for determining the percentage of the employee’s home used as a workspace, including situations such as common versus designated workspaces, more than one employee working in the same home, and changes of workspace during the year.

Eligible expenses

Eligible expenses include home office expenses as well as office supplies. Employees must separate the expenses between their employment use and non-employment (personal) use.

Eligible home office expenses include electricity, heat, water, utilities, home internet access fees (new for 2020), maintenance and minor repairs, and rent. (Commissioned employees can also claim some other expenses).

Non-eligible home office expenses include mortgage interest, principal mortgage payments, home internet connection fees, furniture (e.g., office chairs and desks) and capital expenses (e.g., replacing windows, flooring and furnace). To determine the amount that is deductible, eligible home office expenses are prorated by percentage of the home used as a workspace (discussed above).

Where an employer requires the employee to pay for office supplies or certain phone expenses, the employee may be able to claim those expenses. The CRA’s website includes a comprehensive list of eligible and ineligible supplies. Eligible supplies do not need to be prorated like other home office expenses.

In general, to be eligible, the cost of supplies must relate to things that are consumed when doing work, such as paper or ink. The costs of more permanent items like calculators and computer cables are not deductible as office supplies, even though they are relatively inexpensive. The CRA is quite strict in applying these rules.

Calculating eligible home office expenses

Once the proration factor for costs other than supplies and total costs has been determined, the employee can then determine the portion of each type of cost that is eligible for deduction. When doing the calculation, only expenses incurred during the work-from-home period(s) qualify.

For employees using the detailed method, the CRA provides guidance to help determine eligibility, employment use of workspace and eligible expenses. The CRA also offers an online calculator that guides users through the process of computing the home office expense deduction under the detailed method, including prorated amounts.

One common question is how to calculate the amount of internet access fees that relate to employment. The CRA’s calculator prorates these costs like other costs such as electricity or heat (i.e. based on the home work space percentage). In a December 2020 Question and Answer session, the CRA confirmed they would allow employees to use another reasonable method for this calculation but did not specify what other methods would be acceptable. Since internet use is hard to track and billing methods vary, it is not clear how an alternative approach would be documented.

Another thorny issue relates to condominium fees. The CRA has stated that employees can claim the portion of these fees that relate to electricity, heat and water consumed in a condo unit owned by the employee using a reasonable basis. The CRA then describe an approach where an employee can use costs obtained from the condominium administrator.

Obtaining this information and calculating an amount may not be straightforward, so we have asked the CRA to ease the process by allowing employees to use a reasonable estimate for claiming condo fees.

Employees who use the detailed method need to maintain documentation to support their home office expense claim, and have a signed copy of either Form T2200S or T2200 at the time they make their claim.

Employees claiming both home office and other employment expenses (such as automobile deductions) should use Form T777 Statement of Employment Expenses. Employees claiming home office expenses only should use the simplified Form T777S.

Which method produces the best result?

Like many things in tax, the best approach should be determined case by case, based in part on the answers to these questions.

• Do you rent your home? Under the detailed method, renters generally have higher eligible expenses than homeowners. Mortgage interest is generally not deductible, and costs such as insurance and property taxes are only eligible for commissioned employees. However, such expenses are indirectly reflected in rental payments, so the total expense that renters use as a starting point is usually much higher.
• Do you own your home? Although $2 per day doesn’t sound like much, if your actual eligible costs are mainly limited to utilities and internet, then your actual prorated cost may be in this ballpark.
• What is a reasonable internet amount? As discussed, the CRA’s calculator prorates internet costs based on floor space usage in the same way as other costs. If an alternative but reasonable approach is used, this could result in a somewhat higher deductible amount than the fixed rate approach.
• Do you qualify under one method but not the other? Some employees may be eligible for one method but not the other. For example, an employee who also wants to claim automobile expenses must use the detailed method.
• Which method is simpler and costs less? If you qualify, the fixed rate method is simpler to use and no T2200 is needed. If you use a practitioner to prepare your tax return, the fees may be lower depending on how you are charged and the work involved to make a detailed claim.

Changing prior-year returns for unclaimed home office expenses

With all the talk of home office expenses, some employees may realize they could have been claiming these expenses in past years.

Currently, however, the temporary flat rate method and the simplified T2200S and T777S forms are only allowed for the 2020 tax year. For previous years, employers and employees must meet the general conditions and complete the T2200 and T777 forms that applied to those years.

Individuals can ask to change a return for tax years ending in any of the 10 previous calendar years (i.e., as far back as the 2010 tax year), applying the rules in place for home office claims in each of those taxation years.

T2200 considerations for employers

After the CRA introduced the simplified T2200S form, employers raised a number of concerns with us. Here are some of the most common issues we heard:

Which form?

As discussed, a T2200 or T2200S is only needed for employees who want to use the detailed method. If the employee worked from home only because of the pandemic, the T2200S can be provided to them. For employees who have additional expenses, such as working from home generally (i.e. before the pandemic hit), travel expenses or other costs, then the regular T2200 is required. The CRA updated the T2200 on January 18, but unfortunately, it did not include the new home office wording from the T2200S on the T2200. On the revised T2200, the home office question is “Did this employee’s contract of employment [under the contract itself or in a separate written or verbal agreement] require them to use a portion of their home for work?” We asked the CRA for guidance where an employee worked at home due to the pandemic only but also had other deductible employment expenses. In such a situation, we believe the best approach is to complete the T2200 for non-home office expenses only (i.e. don’t answer question 10 and the related information) and provide the employee with a T2200S in the same manner as other employees to cover off home office expenses. We are awaiting comments from the CRA on this issue, but we believe our suggested approach is reasonable.

Employers’ responsibilities

As discussed, employees who want to use the detailed method must have a T2200 or a T2200S. Employers will need to decide whether to go ahead and provide the form (generally, T2200S) to any employee who could be eligible to use the detailed approach, or whether they will only provide the form to employees who ask for it.

Electronic signatures

The CRA requires an employer to have an authorized person sign the T2200S or T2200 and provide their contact details. The CRA will accept electronic signatures on these forms for 2020. Employers who plan to provide T2200S forms to all eligible employees may be able to partly automate the process by merging the names and answers to the questions for each eligible employee into a pre-signed template form.

Authorized person

According to the CRA, determining who is an authorized person for purposes of certifying the T2200 and T2200S forms is up to the employer’s discretion. The CRA does not require the form to be signed by an authorized “officer”. The authorized person’s contact information is required to be included in case the CRA would like to follow up, and employers should consider this when determining who should certify the form.

Employees who were already required to work from home

The new measures do not affect employees who worked from home before the pandemic and claimed the related expenses. Employers should follow their existing T2200 process for these employees.

Updates from the CRA

As noted earlier, we are waiting for answers from the CRA on a number of questions. We will update this blog as we receive updates, so check back regularly for the latest news on home office deduction claims for 2020. We will also highlight any changes to this blog on our Federal Government COVID-19 Tax Updates page.

NOTE: The commentary function of this page has been temporarily closed. Unfortunately, because of the volume of feedback regarding recently announced COVID-19 tax measures, we do not have the capacity to respond to individual inquiries. We strongly encourage you to visit our Canadian Tax News and COVID-19 Updates page for information.