Cottage office must pass lots of 'tests': Working there whole summer no guarantee of deduction

National Post


The summer months leave many corporate offices deserted, with executives
fleeing town to spend time at the cottage or cabin. And the ability to stay in
touch with the office while cottaging means urban professionals can often
combine business with pleasure while away from the city, perhaps by sandwiching
a working Friday and Monday around the weekend escape.

Some execs have even set up complete "home offices" in their summer
properties, which may include separate phone and fax lines as well as satellite
high-speed Internet hookup. The available technology certainly makes it easy to
work from your summer home -- and for those who qualify, the ability to claim
some of the associated expenses makes it easy to justify the cost.

The rules for deductibility of home -- or cottage -- office expenses will
depend on whether you are an employee or self-employed.

Employees can deduct certain home office expenses if the work space in your
home is the location where you "principally" (more than 50% of the time) perform
your duties of employment and you are "required by the contract of employment"
to maintain such an office. (Note that this requirement must be certified by
your employer on Form T2200, which is filed with your tax return.)

To illustrate, let's take Donna, an executive at a financial services firm
who decides, on her own initiative but with the company's permission, to work
two days a week from her cottage during the summer months. Since Donna still has
an office at her company's premises in the city, she is likely to meet neither
the "principally" test nor the "required by contract" test.

What if she were to spend the whole week at the cottage or, for that matter,
the entire summer? Again, the issue is whether the summer office can be
considered the place where she "principally performs the duties of the office or
employment." In the context of the summer months, the answer may be yes, but in
the context of the whole year, the CRA would likely argue that her principal
place of employment is still her employer's premises. Even if Donna was
successful on the "principally" test, she would still have to meet the "required
by contract" test to claim her deduction.

Now, if Donna were self-employed, like a partner at a law, accounting or
other professional services firm, the rules would be slightly different.

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 be your
principal place of business. This is quite different from employees, since there
is no "required by contract" test.

In other words, self-employed Donna, who simply chooses to work from her
cottage during the summer, may indeed be able to argue that her principal place
of business during the summer was in fact her cottage even though she was not
"required" to work there.

That being said, such an argument could still be insufficient in the taxman's
eyes to allow a deduction for her cottage office expenses since her "principal"
place of business would likely still be her firm's premises, where she spends
most of her time during the year.

While there have been no reported "cottage office" tax cases to date, if the
issue did come to court, a judge would have to review all the specific facts to
determine whether the term "principally" could potentially apply to just the
summer months, as Donna would like, or applies to the calendar year as a whole.

Any volunteers for a test case?

Colour Photo: Tom Tucker, 32, will be competing in the Canadian Ironman at the
end of August.