How to Calculate the Home Based Business Tax Deduction in Canada

Is Your Home Business Eligible for the Home Office Tax Deduction?

A typical home based business
••• How to claim the home based business tax deduction. Image (c) Susan Ward

If you run a home business, you'll want to be sure you deduct all the relevant home business expenses on your income tax.

However, although there are income tax deductions that are specific to home businesses, not all home businesses will qualify for them. The CRA (Canada Revenue Agency) has stringent conditions that determine whether or not a home business owner can claim business-use-of-home expenses (the home office tax deduction) on line 9945 of the T1 tax form.

Who Can Claim the Home Based Business Tax Deduction

You can only claim business-use-of-home expenses if your home is your principal place of business, or you use the work space in your home only to earn your business income and use it regularly to meet with clients, customers or patients.

So you can't claim business-use-of-home expenses if you are conducting business somewhere else as well, or because you sometimes work on business matters at home.

How to Claim the Home Based Business Tax Deduction

If you meet the CRA requirements, you're ready to calculate your business-use-of-home expenses. Because you're doing business where you live, your expenses will be a percentage of your home expenses.

It's easiest to calculate if you have a specific room set aside for business purposes, such as a home office. Then it's a simple matter to take the area of your work space and divide it by the total area of your house.

For instance, suppose you have a home office that is 10 x 10 feet in a house that's 1800 square feet. Then your calculation of the allowable portion of business-use-of-home expenses would be: 100 divided by 1800 = 5%. The personal use portion would be = 95%.

The next step in calculating the home business tax deduction is to apply this percentage to your allowable household expenses.

You can deduct a portion of all your house expenses that directly relate to operating your business, such as your utilities, telephone, and cleaning materials.

If you own your home, you can claim a portion of your house insurance, property taxes, and mortgage interest (although you can't claim the mortgage payments themselves.) If you rent your residence, you can claim a portion of the rent you pay. 

Example of Home Office Expense Calculations:

ExpenseAmount
Unused portion of expenses from previous year 
% of home personal use (1700/1800 * 100)95%
Heat$1,000
Electricity$1,000
Home Insurance$1,000
Maintenance and Repairs$3,000
Mortgage Interest$12,000
Property Taxes$3,000
Phone$1,000
Other home office expenses (needs description) 
Total expenses$22,000
Personal use portion (Total * 95%)$20,900
Deductable business use portion (Total * 5%)$1,100

In the above example the expenses total $22,000 for the fiscal year. Then 5% (the allowable portion of business-use-of-home expenses) of $22,000 (total home expenses) is $1,100, which would be the total business-use-of-home expenses claim on line 9945 of the T1 tax form.

Note that Canadian tax software programs will automatically calculate the expense portions based on your personal/business work space ratio.

Adjusting Work Space in the Home Expenses for Mixed Use

If you operate a part-time business out of your home and use the space for both business and personal activities, you have to adjust your work from home expenses accordingly. For instance, suppose you have a home office that you use to run a consulting business five days a week and the rest of the time the office is used for personal activities. To figure out your business-use-of-home expenses, you would calculate how many hours in the day you use the work space in your home for business purposes, divide that amount by 24 hours, and then multiply the result by the business portion of your total home expenses.

Using the same example used above, and operating the business from 9 a.m. until 5 p.m. five days a week, (7 hours a day), the business is being operated for 35 hours a week out of a total number of hours in a week of 168.

Then the deductible business use claim would be reduced by:

35/168 hours x $1,100 = $229.17 - Your total home based business tax deduction

Note that you must have income to make tax deductions from.

You can't deduct an expense from an income you don't have. In other words, you can't use the business-use-of-home expenses to create a business loss, so your deduction can't be more than your net income before you deduct these expenses. If it's more, you can carry the amount of these expenses forward into the next year.

It may not seem like a lot, but when it comes to income tax, every deduction helps. If you run a home business and meet the CRA's definition of business-use-of-home, you'll want to be sure you claim the home based business tax deduction on your income tax.

See also:

Canada Revenue Agency's "Calculation of business-use-of-home expenses" Form T2125

Corporate Income Tax Canada Guide

The Most Overlooked Tax Deductions for Canadian Small Businesses

When Is the Canadian Taxes Due Date?