In my last post I said the home office calculation was fiddly and left it there. Fair enough — it is. But “fiddly” isn’t a reason to skip it, and skipping it is what most people do.
Here’s the thing that should make you pay attention: home office claims are one of the things CRA reviews most often. Not because claiming one is suspicious. Because they are so easily done wrong that reviewing them tends to be worth CRA’s time.
So let’s do it properly.
First: are you even allowed to claim it?
You qualify if one of these is true:
- The space is your principal place of business, or
- You use the space only to earn business income, and you use it on a regular and ongoing basis to meet clients, customers or patients there.
For most online businesses it’s the first one. Your home is where the business happens. That’s enough — the space does not have to be a separate room with a door, and there is no rule that says a dining table can’t count.
If you’re an employee, stop here — this post isn’t about you. Employees claim home office costs through an entirely different route (form T2200 from your employer, and the detailed method). The temporary $2-a-day flat rate that everyone got used to during the pandemic years was for employees only, and CRA eliminated it after the 2022 tax year. If someone tells you to “just claim the flat rate,” they’re three years out of date.
What you can actually claim
You claim a portion of the running costs of your home:
- Heat, electricity and water
- Home insurance
- Cleaning materials
- Maintenance and repairs
- Rent, if you rent
- Mortgage interest, if you own — the interest only, never the principal
- Property taxes
Two that trip people up:
Your mortgage payment is not an expense. Only the interest portion is. The principal is you buying an asset, and CRA is not going to help you do that.
Phone and internet: three different rules, not one
This is where I see the most confusion, and it isn’t one rule — it’s three.
- Your home landline. The basic monthly rate is not deductible. Not a portion of it — none of it. You can claim business long-distance calls made on it. If you keep a separate line used only for business, that line’s basic rate is fully deductible.
- Your cellphone. Claim the business share of your airtime. That’s based on how you actually use the phone, not on floor area.
- Your internet. This is the one that gets filed in the wrong place. Internet isn’t an occupancy cost — it isn’t heated square footage — so it doesn’t belong in the business-use-of-home pool on line 9945. It goes on line 9220, telephone and utilities, apportioned by how much you actually use it for the business rather than by floor area. CRA doesn’t name internet explicitly on either page, so this is a reasoned position rather than a quoted rule. Why it matters more than a line number: business-use-of-home expenses can’t create or increase a loss and have to be carried forward, while line 9220 expenses can. File your internet in the home-office pool and you may be deferring a deduction you were entitled to take this year. We normally start at 50%, and go higher where you can show personal use is genuinely minimal.
That 50% is our working position, not a number in the Income Tax Act. It’s defensible for a business that runs entirely online, and it sits well below what you could argue for — but it is still a position. Which brings us back to the only test that matters: could you explain your number to a reviewer without flinching?
The trap to avoid: don’t claim internet in both places. If it’s already inside your business-use-of-home utilities, it can’t also be a separate 50% line. Pick one.
The calculation: two steps, not one
This is the part I called convoluted, and here’s why.
Step one — space. Work out what share of your home the workspace takes up. Square footage is the usual basis: 120 square feet of office in a 1,200 square foot home is 10%.
Step two — time. If that space is only ever the business, you stop at step one. But if it’s the dining table, or the spare room that’s also a guest room, you have to account for the hours it isn’t the business. CRA’s method is hours of business use divided by 24.
So the dining table that’s an office 8 hours a day, 5 days a week isn’t 10% of your home costs. It’s 10% × the business-use share of the week. The number gets smaller, and it should — but it’s still a number, and most people claiming nothing are claiming less than they’re entitled to.
The good news, and it’s real: you do this once. Unless you move or the space changes, the same formula carries forward year after year. It’s one bad afternoon that pays you back every year afterwards.
Three rules that catch people
1. It can’t create a loss. Your business-use-of-home deduction cannot be more than your net business income before the deduction. If the business made $3,000 and your home office works out to $4,000, you claim $3,000 this year.
You don’t lose the rest. The unused portion carries forward to next year, as long as you still qualify. This is the single most common thing people get wrong — they either force the loss, or they assume the excess evaporates and stop tracking it. Neither is right.
2. Don’t claim CCA on your home. You can claim capital cost allowance on the business portion of a home you own. CRA allows it, and I will almost always tell you not to. Claiming it puts the business portion of your home into capital gain and recapture territory when you sell — which can cost you a slice of an exemption worth far more than the deduction ever was. It’s a rare case where the allowable thing is the wrong thing.
3. Keep the evidence for six years. Utility bills, the property tax notice, the mortgage interest statement, the measurements you based the percentage on. Especially the measurements — that’s the piece nobody keeps, and it’s the first thing you’ll be asked for.
If you get a review letter about it
Don’t panic, and don’t assume you’ve done something wrong. Most CRA reviews are just that — a review. Read it properly, note exactly what’s being asked for, and send exactly that and nothing more.
If the deadline doesn’t work, phone the person whose name is on the letter and ask for more time. In all the years I’ve been doing this I have never had an extension turned down. People just don’t ask.
Where this leaves you
The home office deduction is worth claiming and worth claiming correctly. Those are two different jobs, and the second one is where the money and the risk both sit.
If you want to go wider than the home office, the companion to this post covers the business expenses most online businesses are missing — the ones nobody thinks to ask you about.
And if you’d rather someone just looked at your file and told you what’s there and what’s missing, that’s what a Books Check-Up is — an independent review, a recorded walkthrough of what we find, and a written list of what to fix.
Kelly Christian
KC & Company