Defining "principal place of business"
The ability for advisors to write off their home-office expenses has garnered increasing scrutiny in recent years by both the Canada Revenue Agency (CRA) and the courts.
The Income Tax Act contains a set of rules that dictate whether or not certain home-office expenses can be deducted. The rules for deductibility, however, will depend on whether you are an employee or self-employed.
For employees, if the work space 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. Note that this requirement must be certified by your employer on Form T2200, which need not be filed with your return, but must be kept in case the CRA wants to see it later on.
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.”
But what is meant by “principal place of business”? This question has come before the courts several times in the past few years, most interestingly in the following two cases.
Ryan v The Queen (2006 TCC 132)
The eligibility for a self-employed physiotherapist to claim home-office expenses was the subject of the first case. Marty Ryan worked full time at a physiotherapy clinic and performed treatments on between 16 to 20 patients a day at the clinic. Mr. Ryan also had a home office in which he did all his billing as well as his accounting. He also used his home office to fill out insurance and disability-parking forms — services for which he charged.
In the evenings and weekends, he used his home office to return his patients’ telephone calls, often providing them with followup or professional advice by phone. Mr. Ryan testified that he made “an average of three to five calls per evening and on Saturdays.”
The CRA argued that since Mr. Ryan did not actually physically treat patients at home, he did not meet the conditions necessary to write off his home-office expenses, namely “that the workspace in home was not [his] principal place of business.”
While Mr. Ryan’s home office may not have been his principal place of business since he worked mainly at the clinic, the judge had to decide whether Mr. Ryan’s home office met the alternate test. In other words, whether it was “used on a regular and continuous basis for meeting patients … in respect of [his] business.”
Fortunately for Mr. Ryan, the judge concluded that “making telephone calls to patients each evening and on Saturdays from his home is likewise comparable to meeting those patients directly at his home … In my view, we can say that [Mr. Ryan] used his workspace in his home on a regular and continuous basis for meeting clients.” The judge therefore allowed Mr. Ryan to deduct the full costs of the home-office expenses claimed for the three tax years in question.
A word of caution to advisors in similar situations: this decision was heard under the “informal procedure” and is thus non-binding. In fact, in 2007, the CRA stated that in its opinion, “meetings refer to those held in person.” (CRA Views doc — 2007-0228231I7).
Jenkins et al v The Queen (2005 TCC 167)
The second interesting case stands for the proposition that you may be entitled to write off your home-office expenses, even if you only work there part of the time.
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 their basement office where they prepared their payroll, kept the financial records of the business and where Mr. Jenkins spent 80 per cent of his work time when not at sea.
The CRA argued that since fishing, by definition, requires spending a lot of time at sea, it was impossible to say that a fisher’s principal place of business was anything other than a boat.
The judge disagreed as he felt that this approach could lead to “some odd conclusions.” He gave the example of Calgary-based Imperial Oil, analogizing that, by using the CRA’s logic, its principal place of business would be the oil fields and not its downtown Calgary office.
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. Business stuff includes contacting customers and suppliers, filling in invoices, doing payroll, maintaining the accounting books and records, collecting receivables, handling customer complaints, creating business plans, preparing financial statements, among other activities.
This decision may prove to be popular even among landlocked advisors, especially those who spend most of their time “on the road” meeting clients, but still maintain a home office that is used exclusively for the “business side” of the business.