Can I Use My Home as a Business Expense?
In Canada, if you use a part of your home regularly and exclusively for business purposes, you may be eligible to deduct certain expenses associated with that part of your home for income tax purposes. This is known as the “home office expense deduction”.
To qualify for this deduction, the home office must be your principal place of business or used on a regular and ongoing basis to meet with clients or customers. Additionally, the space must be used solely for business purposes and not for personal use.
Expenses that may be deductible include a portion of your home’s utilities, maintenance and repairs, property taxes, and mortgage interest or rent. However, the deduction is limited to the income earned from the business or profession, and any unused expenses cannot be carried forward to future years.
It is important to note that claiming the home office expense deduction can be complex, and the Canada Revenue Agency (CRA) has strict rules regarding what qualifies as a deductible expense. It is recommended that you seek the advice of a tax professional to ensure that you are claiming the correct deductions and complying with all CRA regulations.
How Does the Home Expense For a Business Work?
Let’s assume that you own a home in Canada that is 2000 square feet and you use 400 square feet of it exclusively for business purposes.
To calculate the home office expense deduction, you would need to determine what percentage of your home is being used for business purposes. In this case, the calculation would be:
400 square feet (size of office space) ÷ 2000 square feet (total size of home) = 0.20 or 20%
So, you would be able to deduct 20% of certain expenses associated with your home, including:
- 20% of your mortgage interest or rent
- 20% of your property taxes
- 20% of your home insurance
- 20% of your utilities, including electricity, gas, water, and internet
This can be a significant tax benefit to you as a business and home owner simultaneously.
Does This Help You Pay Off a Mortgage Faster?
Claiming the home office expense deduction in Canada can help reduce your taxable income, which in turn can reduce your overall tax liability. However, it’s important to note that this deduction will not directly help you pay off your mortgage faster.
The home office expense deduction is intended to help offset the costs associated with using a portion of your home for business purposes, but it will not provide you with any additional income to pay off your mortgage. It simply reduces the amount of tax you owe on your business income, which could potentially free up some cash to put towards your mortgage payments.
If your goal is to pay off your mortgage faster, you may want to consider other strategies such as increasing your monthly payments or making lump sum payments towards the principal. While claiming the home office expense deduction can help reduce your tax liability, it is not a direct path to paying off your mortgage faster.
Does it matter if your business is registered such as a Sole Proprietorship or Incorporated?
The eligibility for the home office expense deduction in Canada is the same whether your business is registered as a sole proprietorship or incorporated. However, there may be some differences in how you claim the deduction depending on the legal structure of your business.
As a sole proprietor, you would report your business income and expenses on your personal income tax return using a T2125 form. The home office expenses would be included as part of your business expenses on this form.
If your business is incorporated, you would need to report the home office expenses on the corporation’s tax return using Form T777, Statement of Employment Expenses. The deduction would be claimed as an employment expense, rather than a business expense.
Regardless of the legal structure of your business, the same rules apply for determining whether your home office qualifies for the deduction. You must use the space regularly and exclusively for business purposes, and it must be your principal place of business or used on a regular and ongoing basis to meet with clients or customers.
We work hard to find items that may assist you as an entrepreneur and at the same time, we recommend seeking the assistance of a professional tax expert in making concrete decisions regarding your businesses tax benefits and obligations.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.