Like many of their clients, financial advisors working from home during the COVID-19 pandemic might want to take advantage of home-office related tax breaks for the first time this year.
Although tax deductions for expenses such as portions of home internet or electricity bills or even mortgage interest payments are nothing new, advisors have rarely utilized these breaks in the past because they did most of their business in offices – even independent advisors who run their own shops.
However, the pandemic has spawned renewed interest among advisors in the tax benefits that come with working remotely – especially as many plan to leave their offices sitting empty indefinitely, says Greg Pollock, president and chief executive officer of Advocis, the Financial Advisors Association of Canada,.
Although he says he expects independent advisors, in particular, to adjust their tax strategies accordingly, they should also use caution in deciding what to claim when preparing their 2020 taxes.
“I have a feeling the pandemic is going to create some new precedents,” Mr. Pollock says. “The whole issue of working from home and the legal definition of working from home is going to become very important.”
Cynthia Kett, principal at Stewart & Kett Financial Advisors Inc. in Toronto, says advisors shouldn’t expect any clarity from the Canada Revenue Agency (CRA) on what can be justified as legitimate remote-working expenses.
“It would be an administrative nightmare for [the CRA],” she says. “They would open the floodgates on all sorts of people trying to make claims. And it would certainly not be cost-effective for the CRA to try to enforce any of those rules.”
Even in the absence of updated rules, Ms. Kett says the golden rule of deductions should still apply: “If you incur a cost for the purposes of generating business, then it’s a deductible expense.”
The key when deciding to claim these expenses as deductions is being able to justify them, says Kyle Lamothe, a partner at Thorsteinssons LLP in Toronto whose legal practice focuses on tax planning for businesses and individuals.
“Anything from your Zoom membership to an upgraded Internet package, if you can tie it back to practicing at home, those should all be good deductions. But as with any home expenses, you have to look at them and [ask yourself] what’s for personal use and what’s for business. If your whole family is using the same Internet package that you use for your business, it is probably not reasonable to deduct 100 per cent of the bill,” he says.
“Those things are going to be important. As you might expect, there’s a lot of audit activity in these areas, and we have no idea whether it will be increased because more people are making these claims.”
In terms of deducting a portion of the interest on a mortgage payment, he says that “if you only have four rooms in your house and one of them has become your office, it’s simple to do the math.”
Other arrangements can “get a little more complicated,” Mr. Lamothe says.
Then there’s the issue of the principal residence exemption that allows Canadians to profit from the sale of their home tax-free. If advisors start claiming deductions on the interest they pay for a mortgage on their principal residence, Mr. Lamothe says they would lose a portion of that exemption whenever they sell their home.
“You cannot keep your principal residence exemption for the entire property and claim (business deductions) at the same time,” he says.
The situation is quite different for those who hold a secondary property for which they would have to pay capital gains taxes upon sale, Mr. Lamothe says. “Say [you have] a cottage and you went up there to work and self-isolate. You aren’t going to claim it is a principal residence anyway. … I know some people who are doing that.”
The key to getting those deductions approved, he says, is justification. For example, electricity bills that show much more power usage at a secondary residence in 2020 compared with 2019 might be a good idea.
Another option Ms. Kett says would be more useful for advisors to consider is to take further advantage of commonly used but often underutilized deduction options – such as capital claims for investments in technology, which are likely to rise – rather than try to hunt for home-office-related loopholes.
“What we are doing is that anything we feel is a reasonable business expense for our employees or for us to incur in order to be able to work from home, we’re just reimbursing them,” Ms. Kett says. “That’s going to be a deductible expense for our business and certainly a legitimate one, but trying to claim home-office expenses doesn’t really make sense in the big picture.”
Advisors will need to further embrace a holistic approach to their tax strategies as the mix of remote and in-office work is likely to fluctuate for quite some time, Mr. Pollock says.
“I think we will see a real variety of (tax) practices that were not as obvious six months ago. More people will continue to work from home more so than they had in the past. Will they retain a separate office or not? I think it is going to vary,” he says. “Some people may completely abandon the office while others will try to revert back to face-to-face all the time.”