House Rules

National Post


Pay close attention to business-use-of-home expenses

If you operate a small business from your home, you may want to pay particular attention to how you track and claim expenses for income tax purposes.

Take the recent case of an Ontario lawyer who found himself in Tax Court battling Canada Revenue Agency over disallowed expenses he had claimed on his tax returns in 2008 and 2009. During the two years in question, the lawyer operated his law practice out of a 100-year-old brick building owned by his numbered company. During the relevant years, he used both the ground floor and the basement of the building for his law practice and lived in the apartment on the top two floors.

Under the terms of his lease, the law firm was responsible for the "property taxes, utilities, maintenance, insurance costs and 'all other charges, impositions, costs and expenses of every nature and kind whatsoever' in respect of the 'premises.'" In filing his return, he deducted various expenses for property taxes, maintenance and repairs, telephone and utilities. His position was that his law practice was responsible for paying all the expenses for the building and "should be entitled to deduct them."

The CRA, however, disagreed and felt that a portion of the expenses were "personal expenses incurred by the (taxpayer) in respect of his occupancy of the top two floors of the building." Using a percentage of the total area agreed upon by both the CRA and the taxpayer, the CRA disallowed 28% of the amounts claimed by the lawyer for telephone, utilities and property taxes on the basis that they were "personal and living expenses."

The judge reviewed the wording of the lease and particularly focused on the term "in respect of the premises." A definition of that term in a schedule attached to the lease defined the premises as "all those portions of (the house) which the law office of (the taxpayer) will at any time wish to occupy..." The judge therefore concluded that since the law practice only occupied the basement and the first floor of the building, it can deduct only those expenses that were attributed to the space it occupied and upheld the CRA's disallowed percentage.