Employees who worked from home in 2020 during the pandemic may be eligible to deduct work-related expenses on their personal tax returns.
Employees have two options for deducting home office expenses: the existing detailed method or a temporary simplified flat rate method recently introduced by the Canada Revenue Agency (CRA) for the 2020 tax year.
In general, the detailed method is preferred for employees that expect to claim a home office expense deduction for more than $400 and have the supporting documentation available, such as receipts and floor plans of their home office space. The simplified temporary flat rate option is a good fit for employees who may not have significant home office expenses or who prefer to reduce the complexity involved with the tax return preparation.
Below is a summary of both options, including eligibility for employees:
Temporary flat rate method
The CRA introduced the temporary, simplified flat rate method on Dec. 15, 2020, to ease the administrative burden on employers and employees regarding home office expenses for the 2020 tax year.
To use the temporary flat rate method, an employee must meet ALL of the following conditions:
-The employee worked from home during 2020 due to the COVID-19 pandemic. In situations where the employer provided an employee with a choice of working from home due to the COVID-19 pandemic, the CRA will consider the employee to have worked from home due to the COVID-19 pandemic.
-The employee worked more than 50% of the time from home for at least four consecutive weeks in 2020.
-An employee is only claiming home office expenses and not claiming any other employment expenses.
-The employer didn’t reimburse the employee for all home office expenses.
Under the temporary flat rate method, the employee doesn’t need to fill out Form T2200 (Declaration of Conditions of Employment) from their employer and isn’t required to maintain documents or receipts to support the claim.
The employee also doesn’t have to determine the size of their workspace to claim home office expenses.
Instead of claiming a pro-rated portion of actual home office expenses incurred in 2020 (e.g., utilities, home office supplies, rent or other qualifying expenses), a temporary flat rate of $2 per work day that the employee worked from home may be claimed (up to a maximum claim amount of $400).
For counting work days, any day where an employee worked full-time or part-time at home counts. Days off, including weekend days, vacation days, sick leave days, or any other leaves of absence, would not count as a work day. However, additional days worked as overtime would count as work days.
Also, each employee working within the same home (e.g., two spouses or common-law partners, roommates, parents with adult children), can claim the temporary flat rate method if they meet the eligibility rules.
Employees that use this option can’t deduct any other employment expenses for 2020. The temporary flat rate method is only available for the 2020 tax year due to the COVID-19 pandemic. To use the temporary flat rate method, employees must complete Form T777S (Statement of Employment Expenses for Working at Home Due to COVID-19) with their 2020 personal tax return.
On Dec. 16, 2020, Revenu Québec announced that it would also introduce a simplified home office expenses deduction for employees for the 2020 tax year to emulate the federal measures. Eligible Quebec employees may claim a home office expenses deduction at a flat rate of $2 per work day up to a maximum claim amount of $400. Quebec employees will not be required to obtain Form TP-64.3 General Conditions of Employment to support their claim.
Existing detailed method
The CRA appears to have relaxed the requirements to use the detailed method for claiming the home office expenses deduction. Still, the existing method of deducting home office expenses is more detailed and requires more supporting documentation.
To use the detailed method to claim actual expenses incurred while working from home, an employee must meet ALL of the following conditions:
-The employee worked from home in 2020 due to the COVID-19 pandemic OR the employer required the employee to work from home. In situations where the employer provided an employee with a choice of working from home due to the COVID-19 pandemic, the CRA will consider the employee to have worked from home due to the COVID-19 pandemic.
-The employee was required to pay for expenses relating to the workspace in their home.
-The workspace is where the employee mainly (over 50% of the time) works for at least four consecutive weeks OR the employee only uses this workspace to earn employment income (must be used to regularly and continually meet clients, customers or other individuals in the course of employment).
-The employee’s expenses are used directly in their work.
-The employee has a completed and signed Form T2200S (Declaration of Conditions of Employment for Working at Home Due to COVID-19) from the employer OR a completed and signed Form T2200 (Declaration of Conditions of Employment) from the employer.
The employer’s requirement for an employee to work from home doesn’t have to be part of an employment contract and may be part of a written or verbal agreement.
The detailed method requires employees to determine the size and use of their workspace, including the percentage of the home used as a workspace. For instance, a 300-square-foot dedicated workspace in a home with 2,000-square-feet of finished size would equate to 15% of the home used as a workspace.
If the workspace is a shared or multi-purpose area, such as a kitchen or living room, the home office expenses deduction must be prorated based on the number of hours the space is used for employment. For example, if an employee uses a dining table for 35 hours a week as a workspace (out of the available 168 hours in a seven-day week), any claim must be pro-rated by 20.83% to account for the use of the dining table for uses other than employment.
Where an employee has multiple workspaces in a home or moved during the year to a new property (and worked from home at each property), the employee must calculate the home office expenses deduction for each workspace for the part of the year that it was used for employment and aggregate each portion into a single claim on their 2020 personal tax return.
Eligible expenses for a workspace in the home, for salaried and commission-based employees, include items such as rent, utilities (electricity, heat and water), maintenance, home internet access fees, office supplies, employment use of a basic cell phone service plan and long distance calls for employment purposes. Commission-based employees may also claim home insurance and property tax.
It’s worth noting that home office expense deductions are limited to the amount of employment income after other employment expenses have been deducted. If the deduction can’t be used for 2020, it may be carried forward to a subsequent year and deducted against income from the same employer. Losses can’t be created using the home office expenses deduction. For commission-based employees, the total commission expenses (which includes home office expenses) is limited to the amount of commission income earned.
Where an employer has reimbursed an employee for some home office expenses, the detailed method can still be used (provided eligibility requirements are satisfied). However, an employee can’t claim any expenses that were or will be reimbursed by the employer.
If you have questions, please speak to your Client Wealth Management team representative or the Wealth Planning Team.
For more on home office deductions, please download our guide.