We wanted to explain the options that are available to employees who worked from home in 2020 due to COVID-19, when filing their 2020 T1 Income Tax and Benefit Return (T1). As always, individuals should reach out to their own tax advisors to discuss and confirm their particular circumstances.
The Government’s announcement was aimed at simplifying the requirements that were already in place for employees who work from home, and their employers. It has come with the introduction of new ‘simplified’ forms and the option for some employees to use either the temporary ‘Flat rate method’ or the ‘Detailed method’ to calculate the amount that can be deducted for ‘work space in home’ (home office) expenses in 2020.
Who can deduct home office expenses?
An employee can deduct if:
- the employee worked from home more than 50% of the time for at least four consecutive weeks in 2020 due to COVID-19, and
- the employee incurred expenses directly related to their work, for which they were not and will not be reimbursed.
Home office expenses can be claimed using either the flat rate method or the detailed method. That being said, if an employee claimed home office expenses in prior years, the flat rate method is not available to them. The employee must continue to use the detailed method.
Let’s begin with an overview of the two methods.
Flat rate method
- This method can only be used if the employee has never reported home office expenses in a prior taxation year.
Following the flat rate method, the employee:
- can deduct $2 per day that they worked from home in 2020 up to $400, the maximum deduction,
- does not have to retain any documents to support the home office deduction,
- completes Option 1 of Form T777S, Statement of Employment Expenses for Working at Home Due to COVID-19 and it is filed with the employee’s 2020 T1, and
- for the employee who is a resident of Quebec, completes parts 1 and 2 of Form TP-59.S-V, Expenses Related to Working Remotely Because of the COVID-19 Pandemic and it, too, is filed with the employee’s 2020 T1.
When deciding to use the flat rate method, keep in mind that this method limits the deduction to home office expense, only, so if the employee wishes to claim other expenses, such as those related to the use of their automobile for employment purposes, the detailed method would have to be used.
With this information in hand, let’s take a look at the detailed method.
Following the detailed method, the employee:
- must identify their home office expenses,
- must keep supporting documents to support the deduction,
- must calculate the percentage of the home that is used as a home office,
- completes Option 2 of Form T777S, Statement of Employment Expenses for Working at Home Due to COVID-19 and it is filed with the employee’s 2020 T1, and
- for an employee that is resident of Quebec, completes parts 1 and 3 of Form TP-64.3-V, Expenses Related to Working Remotely Because of the COVID-19 Pandemic and it is filed with the employee’s 2020 T1,
- must obtain a completed and signed Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19 or Form T2200, Declaration of Conditions of Employment from their employer. This form is not filed with the employee’s T1, but is retained in their files, should it be requested by CRA at a future date, and
- who is a resident of Quebec, must obtain a completed and signed Form TP-64.3-V, General Employment Conditions from their employer. This form is not filed with the employee’s T1, but it is retained in their files, should it be requested by Revenu Québec.
The following are eligible home office expenses:
- utilities – electricity, heat, water, the utilities portion of condominium fees,
- home internet access fees (new for 2020; excluding modem/router rental),
- minor repairs and maintenance,
- rent paid for a house or apartment where the employee lives,
- employment-related long distance calls and use of a basic cell phone service plan, and
- supplies that are not reimbursed by the employer.
Another item of note, is that the employee may be able to deduct maintenance costs specifically related to their home office (i.e., they may not be limited to the pro-rata calculation outlined above). These expenses, however, must not be of a capital nature and they must not include expenses the employee incurred to maintain parts of their house that are not their home office.
If the employee also earns commission income, they are allowed to include home insurance, property taxes and lease costs related to a cell phone, computer, laptop, tablet, fax machine, etc. provided these costs are related to earning a commission.
Note that both salaried employees and commission employees cannot claim the following:
- mortgage interest,
- principal mortgage payments,
- home internet connection fees,
- capital expenses (replacing windows, flooring, furnace, etc.), and
- wall decorations.
Finally, if an employee owns their home, they cannot claim the rental value of the work space in their home.
All of the above expenses are reported on Form T777S and, for Quebec residents, Form TP-59.S-V.
Calculating the work space
When using the detailed method, the employee will need to calculate the percentage of the home that is used as ‘work space.’ This is calculated using the area of the ‘work space’ and dividing it by the total finished area of the home, including hallways, bathrooms, kitchens, etc. So, get out the measuring tape!
However, the calculation may not stop there, depending on whether the employee’s home office is a space that is a common space versus a designated work space, either of which may also be shared.
- What if the ‘work space’ has multiple uses, perhaps the dining room table? In this example, after calculating the percentage that the ‘work space’ dining room is of the total finished area of the home, multiply that percentage by the number of hours worked in a week divided by 168 hours per week.
- What if the ‘work space’ is shared? In this example, determine what percentage of the room is used by each individual and multiply it by the percentage that the ‘work space’ is of the total finished are of the home.
That percentage is now used to calculate the amount that can be deducted for the employee’s home office expense. A few items of note, though:
- Calculators have been developed by both the Federal Government and Revenu Québec to assist employees with calculating the ‘employment use amount’ to be reported on Form T777S (for Quebec residents, the ‘deduction for teleworking expenses’ to be reported on Form TP-59.S-V):
Revenu Québec http://www.budget.finances.gouv.qc.ca/budget/outils/teletravail-en.asp.
- The amount that the employee can deduct relative to their employment cannot exceed the amount of income earned from the employer, after other employment expenses have been deducted. So, the employee cannot use home office expenses to create or increase a loss from employment. The excess amount, however, can be carried forward to the next taxation year and deducted from income earned from that employer next year.
- If the employee earns commission income, the amount that can be deducted (other than interest and capital cost allowance on their vehicle) cannot exceed the amount of commission income earned. Alternatively, the employee can choose to claim expenses as a salaried employee. Although not all expenses can be claimed, it may prove to be to the employee’s advantage.
For the employee who would like to deduct other expenses related to employment, such as automobile expenses, travel-related expenses, capital cost allowance related to certain equipment, we recommend speaking with a tax specialist about the deductions that can be claimed and the related forms.
With these resources and information, in hand, employees can decide whether to use the flat rate method or the detailed method.
To sum up:
- The flat rate method is temporary and only available for the 2020 taxation year.
- Most employees can choose, to their advantage, to use the flat rate method or the detailed method.
- As a minimum, the employee will have to complete and file at least one additional form, two for Quebec residents, to deduct home office expenses when filing their 2020 T1 (Form T777S, Federally, and for Quebec residents, also, Form TP-59.S-V, assuming the Flat rate method is used).
- If the employee wants to deduct other expenses related to employment, for example automobile expenses, they will have to use the detailed method.
- New for 2020, the cost of reasonable home internet access fees can be included in an employee’s home office expenses – for those using the detailed method, a definite plus.
Information contained in this article is for information purposes only. It is not intended to provide or be a substitute for professional financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies contained in this article to ensure that all elements your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of strategies discussed.
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