At the start of the COVID-19 pandemic, many employees were mandated to work from home to the extent possible and practical in order to abide by government restrictions and public health safety guidelines. Although initially anticipated as a short-term measure, many employees have now been working exclusively from home for a number of months.
As physical workplaces gradually re-open, some employers may be contemplating permanent changes to their employee work from home policies. Some may continue to require, or allow, their employees to work from home on a full-time basis, while other employers may consider introducing a split working model where employees divide their work time between home and the office.
In a previous article, we discussed the relevant tax implications that employers should consider if providing employees with equipment and supplies to support productivity while working from home. CRA recently provided some additional comments to broaden their administrative guidance with respect to employer-provided support for equipment and other related employment expenses. For more information on this new guidance, please see our update in this SPARK issue.
In this article, we will look at the possible tax deductions employees can claim for unreimbursed home office expenses and/or expenditures on supplies they personally incur while working from home during the COVID-19 pandemic.
Current work-space-in the home rules for employees
An employee who is required by employment contract to maintain a home office may be eligible to deduct certain related expenses for a workspace that is either:
- The employee’s principal place of employment (i.e.: where the employee works more than 50% of the time); OR
- Used by the employee exclusively for the purpose of earning income from employment and used on a regular and continuous basis for meeting clients, customers or other persons in the ordinary course of performing employment duties.
In order to claim employment related expenses, an employee must obtain a completed and signed Form T2200 – Declaration of Conditions of Employment from their employer as certification that they were required to maintain a home office and incur related unreimbursed costs. Although CRA does not require the T2200 to be filed with the employee’s tax return, the employee must retain it and provide a copy in response to a request from CRA.
Examples of deductible home office expenses that can be claimed by an eligible employee may include a portion of utilities (i.e. heat, electricity, and water, etc.), rent, and other maintenance costs related to the home office. In addition, employees earning commission income may also be entitled to claim a portion of property taxes and insurance costs. (Note: mortgage interest is not a deductible home office expense for employees.)
A reasonable allocation is required to determine the deductible amount of the above expenses related to the home office. A proration based on the workspace area divided by the total finished area of the home would generally be considered a reasonable allocation by CRA for expenditures that do not relate to a specific area of the house.
The amount that can be deducted for home office expenses cannot create a loss from employment to be offset against other types of income. However, home office expenses that cannot be claimed in a year due to this limitation can be deducted in the following year to reduce net income from the same employer.
Although CRA has historically not allowed deductions for the cost of a home phone line or internet services that are not used exclusively for employment purposes, where it can be demonstrated that additional incremental costs are incurred for carrying out employment duties (i.e. a dedicated phone line and/or long-distance charges), these incremental costs are generally allowed.
Finally, employees who are required by their employment contract to pay for supplies that are consumed directly in the performance of their employment duties may also be entitled to a deduction for amounts that are not reimbursed by their employer, in addition to deductions related to their physical home workspace. Such expenditures may include outlays for various stationary items such as papers, pens, paper clips, binders, folders, ink cartridges, etc. to facilitate working from home.
No capital cost allowance (depreciation) is permitted for capital items such as computers, office equipment or furniture in any employment expense calculation.
Work-space-in-the-home rules and working from home during the COVID-19 pandemic
A number of questions have arisen as to how the above rules may apply during the COVID-19 pandemic.
Although many employees have been required to work from home for at least a period of time during the pandemic, the requirement may not be expressly stated in their written employment contracts due to the sudden onset of these changes to working arrangements.
CRA states that the condition “to be required by contract” may be met without explicit inclusion in a written employment contract in circumstances where the employee can establish that there was a tacit understanding with the employer that the payment of employment expenses (including the cost of a home office) was necessary under the circumstances to fulfill the employee’s employment duties.
However, it is unclear whether this requirement can still be met as employers begin to relax requirements for employees to work from home and transition to an optional work from home model. It appears that where an employee is not required to work from home, but rather permitted or even encouraged to work from home at the employee’s own discretion, this condition would likely not be met and the home office expenses may not be deductible.
Furthermore, even if an employee is clearly required to work from home, there is lack of clarity as to how the first test for a home office, “principal place of employment” (i.e. works from home more than 50% of the time), should practically be applied in these circumstances. There is currently no guidance from CRA on how they would apply the criterion where an employee was required to work from home for a particular period during a year, or where employees are required to work from home for certain days as offices transition to part-time (i.e. part day / part week) work from home arrangements.
In circumstances where the first test for a home office is not satisfied, the second test may be considered. However, applying the second test may also be a challenge in light of the unique realities of the COVID-19 pandemic.
The second test requires that the employee’s workspace must be used exclusively for employment purposes. Many employees who were required to work from home may not have previously maintained a separate home office space. Therefore, although the space may have been dedicated as the employee’s workspace during the crisis, in many cases the space may not be used “exclusively” for employment (i.e. kitchen table, bedroom desk).
Furthermore, the second test also requires that the home office space be “used on a regular and continuous basis for meeting customers”. CRA’s current guidance requires such meetings to take place “in person”, in the traditional sense. Without further guidance, it is currently unclear whether CRA would be willing to consider that online virtual meetings or conference calls could satisfy this criterion, in light of the COVID-19 restrictions with respect to in person meetings.
As mentioned previously, irrespective of whether an employee can meet the criteria to deduct expenses related to their physical home workspace, they may still be entitled to deduct the cost of certain supplies (as mentioned above) for which they have not been reimbursed and that are consumed in the performance of their employment duties.
CRA consultations on work-space-in-the-home expenses
On September 11, 2020, CRA conducted a consultation hosted by the Canadian Chamber of Commerce. The purpose of the consultation was to attempt to clarify and communicate when employees, who are required to work from home during COVID-19, may claim work-space-in-the home expenses. Specifically, CRA indicated that it is working on updating its current guidance to provide clarification with respect to the expenses that qualify for the deduction and the manner in which the deduction should be calculated. It is anticipated that CRA may address some of the issues noted above to provide some clarity when their revised guidance is eventually released.
In addition, CRA is considering introducing a revised, simplified version of form T2200 – Declaration of Conditions of Employment for the upcoming tax season. This simplified form would be tailored to specifically address work-space-in-the home expenses incurred by employees as a result of the COVID-19 pandemic, and possibly attempt to reduce the administrative burden for employers associated with issuing customized T2200 forms to each individual employee.
Despite the current uncertainty, it is recommended that employees keep track of and maintain receipts for all expenses associated with their home office in the event that clarification is provided by CRA allowing those expenses to qualify for a deduction.
As well, it would be prudent for employers to clearly communicate in written company policies their expectations with respect to employee responsibilities to incur certain expenses. In addition to preventing potential surprises later on, the written documentation may also provide a basis for allowing the employee to claim beneficial tax deductions.
For further guidance on the impact of COVID-19 on your specific tax situation, please contact your Shimmerman Penn advisor.
