Occasional work at home doesn't make your space a home office for tax purposes
If you maintain a home office and attempt to write off a portion of your expenses at income tax time, a Tax Court decision released last month may give you reason to review the rules to ensure that your home office expenses are legitimately deductible.
Under the Income Tax Act, there are two sets of rules that govern home office expense deductibility: one for employees and one for the self-employed.
For employees, if the workspace in your home is the location where you "principally" (more than 50 per cent of the time) perform your duties of employment and you are "required by the contract of employment" to maintain such an office, you can deduct certain home-office expenses. This requirement must be certified by your employer on Form T2200, "Declaration of Conditions of Employment," which need not be filed with your return, but must be kept in case the Canada Revenue Agency wants to see it.
If you're self-employed, the only condition you must meet in order to be allowed to deduct home-office expenses is that your home office must be your principal place of business. If it's not, then it must be used "exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business."
In a recent case, the taxpayer, an employment lawyer, attempted to deduct home office expenses of approximately $6,600 and $10,000 in her 2007 and 2008 tax returns respectively. The taxpayer decided to open her own practice in 2006 so that she could control her hours of work and have more time to spend with her kids. She testified that she set up a home office in September 2006 and for the first few months, "practiced fairly exclusively out of her home." That year, she also leased commercial office space along with a friend and four other lawyers.
While it was not her principal office, she testified that her "home office" measured 20 per cent of her home and consisted of an office on the main floor and "most of the area of her basement" in which she stored 200 client files. She stated that the she saw clients at her home office, "in both the upstairs office and the basement office."
Yet when asked if she had any documentary evidence, such as her appointment calendar for 2007 and 2008, she said that she used "the software PCLaw for her calendar and it 'self-erased' every six months." She stated that she also used Microsoft Outlook and it "self-erased."
The Judge felt that the taxpayer's evidence "defies common sense and is implausible. I do not believe that any professional, especially a lawyer, would use a computer program to maintain her records which self-erased after six months."
Since the taxpayer was unable to provide any details with respect to seeing any clients at her home the Judge disallowed her home office expenses. As the Judge wrote, "I have no doubt that the (taxpayer) ... may have had an office in her home. However ... she has not satisfied me that there was a work space in her home which was used ... on a regular and continuous basis for meeting clients."