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tax matters

On Wednesday of this week I was locked-up in Ottawa with a few hundred other poor souls, reading over the federal budget in advance of Bill Morneau's budget speech late in the afternoon. It was about as much fun as, well, sitting in my dentist's chair waiting for a root canal (no offence to my dentist, who is excellent, and a very nice guy).

The budget offered virtually no tax relief and it's clear that Canadians shouldn't expect any such thing in the near future; not while the government racks up $143-billion in additional debt over the next five years.

So, where does this leave the average Canadian? I suggest that getting back to basics is a good thing. Too many of us are failing to take advantage of tax breaks that are right in front of us. Let's start with things you're paying for anyway – like your home. Here's a primer on the "who and how" of claiming home-related expenses to save tax.

The 'who'

You may be able to claim expenses related to your home if you're an employee, a commissioned salesperson, or self-employed. That includes a lot of people. The trick is to understand what you're able to claim, because it differs for each of these three groups.

First, to claim home expenses, your home office must either be your principal place of work (that is, more than half your working time is spent there), or the space must be used solely for your work and used on a regular and continuous basis for meeting clients or customers. And if you're an employee or commissioned sales person, there's one additional requirement: Your employer must require you to maintain an office in your home, and will have to sign Form T2200 to verify this (in Quebec, Form TP-64.3-V).

(Note to employers: Work with your employees to help them pay less tax. For several years now Google has been named the best company to work for. The company brings as much analytics, data and science to their human resource functions as their engineers do on the product side. So, the perks they offer employees are offered for proven reasons. Now, you may not be able to provide free food, diner booths, nap pods, ski gondolas, pubs or garden plots, but surely you can work with your employees to help them pay less tax. If possible, allow them to work from home enough of the time to provide home-office deductions.)

If your boss won't go along with the idea, then consider part-time self-employment. Any self-employment activity will open the door to claim home office costs.

The 'how'

If you're eligible to claim home office expenses, what can you claim? Employees are limited to claiming a portion of any rent, utilities, repairs, maintenance and supplies associated with the home office. Commissioned sales people can add a portion of property taxes and home insurance to the list. If you're self-employed, you can claim those costs already mentioned, and can add a portion of your mortgage interest and depreciation on your home (more on this in a minute) to the list of deductions.

In any case, the deductible portion of the costs is based on the actual size of your home office relative to the size of your home, and the percentage of time you use the space for business purposes. So, you'll have to calculate this percentage.

The nuances

Be aware that the taxman will only allow a deduction for home office expenses to the extent you have income from your employment or business. So, you won't be allowed to create or increase a loss with these costs. The good news, however, is that you can carry any excess home office costs forward for use in a future year if they can't be used this year.

Also, you should generally avoid claiming depreciation (capital cost allowance) on your home. Claiming this deduction will cause the business portion of your home to be taxable if you sell the place at a profit later.

When calculating your business portion of the expenses, you can base your calculation on the number of rooms, or square footage (you can exclude the common areas such as hallways and bathrooms). Use the method that provides the greatest deduction for you.

If you started a business in 2016, but had little or no revenue, be sure to report your home office expenses anyway when preparing your 2016 tax return, since they can be carried forward and applied against business income in the future.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.