Home office rules snagged on fishing case

National Post


As you scramble to complete and file your tax return by the fast-approaching
May 2 deadline, you will be intrigued to learn that you may be entitled to write
off your home office expenses, even if you only work there part of the time. An
interesting tax case heard last month seems to broaden the availability of this

The case involved Prince Edward Island residents Robert and Lorena Jenkins,
who operate a seasonal lobster and tuna fishing partnership from May to October.
On their 2000 and 2001 tax returns, they deducted various expenses associated
with "work space in the home."

The Income Tax Act allows both employees as well as those who are considered
to be self-employed to deduct certain home office expenses, assuming they meet
at least one of two possible criteria.

As an employee, if your work space is the location where you principally
(i.e. more than 50% of the time) perform your duties of employment, you may be
eligible to claim certain home work space expenses. If, however, you fail to
meet that requirement, perhaps because you primarily work out of your employer's
office, then you may still qualify to deduct home office expenses, as long as
the work space in your home is used exclusively for the purpose of earning
employment income and is used "on a regular and continuous basis for meeting
customers" or clients.

If you are self-employed, the criteria are essentially the same, except that
under the first criterion, the work space must be your "principal place of
business." It is the meaning of this phrase that was the subject of the dispute
over home office expenses between the Jenkinses and the Canada Revenue Agency.

The CRA argued that since fishing, by definition, requires spending a lot of
time at sea, it was impossible to say that a fisherman's principal place of
business was anything other than a boat.

The Jenkinses disagreed. They maintained an office in the basement of their
home in which they had a fax machine, telephone and several filing cabinets. It
was in this office that the payroll for their employees was handled and where
they kept the financial records of their fishing business. Mr. Jenkins testified
that when he was not at sea, 80% of his work time was spent in his home office.

The main issue before the Tax Court was whether the work space in the home
could be considered the Jenkins' "principal place of business." The CRA argued
that the word "business," as used in the context of the phrase "principal place
of business" must mean "the core aspect of the business, being in this case the
harvesting of fish" with the result that only the boats could be the principal
place of business.

But the judge said this approach could lead to "some odd conclusions." He
gave the example of Calgary-based Imperial Oil, analogizing, by using the CRA's
logic, that its principal place of business would be the oil fields and not its
downtown Calgary office -- an absurd conclusion.

Hence, the question that really had to be answered was "where does the
business side of the business take place?" The judge compared this question to a
common expression heard amongst lawyers: "I love the actual practice of law, but
hate all the business stuff I have to deal with."

The judge concluded that a principal place of business was not where the fish
are fished, but rather where all the "business stuff" takes place. This includes
contacting customers and suppliers, filling in invoices, doing payroll, among
other activities.

The judge held that the Jenkins' principal place of business was the work
space in their home as it was the only place from where the Jenkinses handled
the business side of their fishing business.

This decision may prove to be popular even among landlocked entrepreneurs,
especially those who spend most of their time "on the road" meeting customers
and clients, but still maintain a home office that is used exclusively for the
"business side" of the business.