Working from home? Don’t miss out on valuable tax savings

COVID-19 has been a major game changer for how employees do their work. Traditional face-to-face meetings, conferences, and everyday commutes have been replaced with Zoom calls, webinars, and a walk from your bedroom to what may be a makeshift home office. With that in mind, this working-from-home arrangement that many of us are now experiencing can be turned into tax savings when it comes time to file your 2020 tax return — and perhaps beyond this year depending on how long your work from home arrangement will continue.

Well, there are specific rules in our tax law that apply to employees who work from home. And, at a high level, these rules allow for an employee who’s required to work from home to claim a deduction for home office expenses, or, as the Canada Revenue Agency (CRA) describes them, Work-space-in-the-home-expenses. According to the CRA, you can deduct expenses for employment use of a workspace in your home if you meet one of these conditions:

• The workspace is where you mainly (more than 50% of the time) do your work.
• You use the workspace only to earn employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.

With this in mind, what does this mean in a pandemic where millions of Canadians were forced to work from home unexpectedly due to lockdowns and other measures put in place by either the government or their own employer? The above-mentioned criteria doesn’t consider this anomaly, making it unclear what work-from-home expenses may qualify for deduction.

Well, there appears to be some guidance on this issue based on a recent CRA consultation — and it’s good news for taxpayers who’ve been working from home.  The short answer is that employees who were required to work from home during the pandemic should be allowed a deduction for home expenses incurred over this time period. Up until this point, there was concern over what was considered “more than 50% of the time,” in terms of being onside for the deduction (for example, would an employee be required to work from home for more than 50% of the year?).

Home office expenses can include rent, utilities, supplies, and repairs and maintenance, but not mortgage interest or capital cost allowance. If you’re a commissioned employee, you can also deduct property taxes and home insurance. These expenses need to be allocated on a proportionate basis based on the amount of workspace the home office takes up aside from repairs and maintenance, which is deducted based on how the expense directly relates to the workspace. Note that the deduction for home expenses is limited to the amount of net employment income; that is, you can’t create or increase a loss from employment. However, any expenses that can’t be deducted in a year can be carried forward and potentially used in future years.

In this case, an employee was required to work from home from March 1 to July 31 due to COVID-19 restrictions.

Based on this example, the employee would be allowed to claim a $500 deduction in connection with their home office expenses, calculated as follows:

Now, if the employee was in a 40% marginal tax bracket, this would translate into $200 of tax savings ($500 x 40%).

If your employer requires you to work from home, it’s necessary that they complete form T2200, “Declaration of Conditions of Employment,” for you to deduct employment expenses related to your home office. In ordinary times, even though form T2200 is somewhat complex and burdensome for employers to complete, it’s still a relatively straightforward procedure, and if you are a regular work-from-home employee this is a form that you would have likely received in the past. The problem is, we’re currently not operating in normal times. Therefore, this presents a challenge for employers to prepare the form and for employees to obtain the form, given the vast number of people across an organization who’ve been required to work from home during the pandemic.

So, to help combat this administrative nightmare in terms of issuing form T2200 to all employees who qualify, CRA has circulated and asked for input on a simplified form, “T2200 Short.” As the name suggests, this drastically simplified form may be the solution to the problem of employees obtaining the proper documentation from their employer to deduct home office expenses in the year. Given that the draft “T2200 Short” is significantly easier for employers to complete (it’s only one page consisting of 4 questions), this will significantly decrease the administrative burden and make it easier to issue the form to employees so they can claim a home office deduction. With that said, this is still not law and CRA is still exploring alternatives — one being redesigning the T4 tax slip that includes a checkbox confirming the employee’s eligibility to claim expenses.

Nonetheless, the good news is that regardless of what solution CRA settles on in terms of documentation, there should be a way for employees to deduct home office expenses during this pandemic year and for all intents and purposes beyond this year. Our recommendation is to continue to keep track of your home office expenses while keeping an eye on the CRA’s final decision in terms of the required documentation as more information should be forthcoming soon.

On November 30, 2020, the federal government released its fall economic statement, providing a means to simplify the home office expense deduction. Recognizing the number of Canadians working from home in 2020 due to the pandemic, CRA will allow employees to claim “modest” expenses of up to $400 in connection with their work from home arrangement this year. As part of this simplified procedure, there'll be no need for employees to track detailed home offices expenses nor will there be a requirement for employers to issue form T2200.  

Although this simplified procedure is good news, as a planning point, it's still possible for employees to claim the home office expense deduction under the existing rules outlined above. Therefore, an employee should look at their situation and determine what method may result in greater tax savings. However, it should be noted that if an employee decides to proceed under the existing rules, this likely will require form T2200 to be issued by their employer  to claim the deduction. 

CRA will release further communication regarding this in the coming weeks.  

Since our previous update, the CRA has provided further guidance on this matter, clarifying two methods for claiming home office expenses for 2020:

1)      Temporary flat-rate method

2)      Detailed method

Temporary flat-rate method

The temporary flat-rate method lets you claim a $2 deduction for every day you worked from home (this excludes weekends, vacation days, sick days, or other days where no work was undertaken), up to a maximum of $400, which is the equivalent of 200 days worked from home (200 days x $2 = $400). To be eligible for this method of calculating your deduction, you must have worked from home more than 50% of the time for at least four consecutive weeks due to COVID-19. Under the temporary flat-rate method, there would be no need to track specific expenses or separate employment expenses from personal expenses. Also, there’s no need for employers to sign or provide a form to claim a deduction for home office expenses under this method.

Detailed method

The detailed method also requires that you’ve worked from home for more than 50% of the time for at least four consecutive weeks due to COVID-19. However, there’s also a requirement that you have your employer complete form T2200 or form T2200S. Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19, is a simplified version of form T2200 that employers can issue if you choose to use the detailed method. If you choose the detailed method, you can deduct home office expenses under the existing rules as outlined above. In addition, CRA has expanded the list of eligible expenses to include home internet access fees when using this method.

As previously noted, an employee should look at their situation and determine what method may result in greater tax savings.

The CRA has made an online calculator available to assist you.

Flat-Rate Method

Building on the previous information above, the CRA has announced that it will allow those who worked from home due to the pandemic to deduct up to $500 in home office expenses under its simplified flat-rate method for 2021 while also extending this deduction into 2022.  The $500 deduction for 2021 and 2022 is up from $400 from the previous year which is equivalent to 250 days worked from home (250 x $2 = $500).   As in the previous year, in order to be eligible to use this method for calculating your deduction you must have worked from home more than 50% of the time for at least four consecutive weeks due to COVID-19.  Under this method, there would be no need to track specific expenses or separate employment expenses from personal expenses.  Further, there is no need for employers to sign or provide a form in order to claim a deduction for home office expenses.

Detailed Method

For employees wishing to claim a home office deduction using the detailed method, the CRA again issued a simplified version of form T2200: form T2200S – Declaration of Conditions of Employment for Working at Home Due to COVID-19.  Employees who anticipate that their eligible expenses will be greater than the maximum amount under the simplified flat-rate method can calculate their expenses using the detailed method.  As a further point, for employees who choose to use the detailed method, home internet fees are now included on CRA’s list of eligible expenses.  A complete list of all eligible expenses are available on CRA’s website.  When using the detailed method, form T777: Statement of Employment Expenses, or the equivalent simplified version, form T777S: Statement of Employment Expenses for Working at Home Due to COVID-19, can be used by employees when claiming home office expenses on their tax return.   It should be noted that the simplified version of form T777, form T777S, was introduced in 2020 but is also available in 2021.

Office Equipment Reimbursement

Lastly, in a related matter to the home office deduction guidance, CRA confirmed that employees are eligible for up to a $500 reimbursement from their employer in costs related to computer equipment, office chairs, and other eligible expenses in connection with working from home because of the pandemic for the period March 15, 2020 to December 31, 2022.  CRA confirmed that this reimbursement would not be considered a taxable benefit to the employee if receipts were provided to the employer proving the expense.  It is important to note that $500 is the total maximum reimbursement across all eligible expenses.

These columns are current as of the time of writing, but are not updated for subsequent changes in legislation unless specifically noted.