Business Use of Home – for the small business owner / sole proprietor
You’ve started your small business and are operating as a proprietor (an unincorporated business) or in a partnership. Can using your home for all or part of your business operations save income taxes from the Canada Revenue Agency (CRA)?
The answer: that depends. You can deduct some pro-rata part of your home expenses, if you can answer yes to one of the two following conditions:
- It is your principal place of business, OR
- You use the space ONLY to earn your business income AND you use it on a regular and ongoing basis to meet your clients, customers, or patients (Whether Zoom or phone meetings counts is an open question, but we assume that the CRA will follow common sense about current business practices and allow those meeting types to qualify).
Provided you meet one of the above two criteria, then the following expenses qualify for deduction:
- Maintenance & repairs
- Home insurance
- Property taxes
- Internet if needed for your business
- Other (water bills for instance, garbage collection)
- IF RENTING: rent for your house, townhouse, or apartment
- IF OWNED: mortgage interest
- IF OWNED: capital cost allowance (called CCA or depreciation)
The pro-rata should be calculated on “reasonable” basis, but typically consists of the ratio of the business use area, to the entire or finished home area. If your space qualified under Question 1, above, and is used for both combined personal and business purposes, then you have to further pro-rata the expenses by time used for business purposes, as a ratio of total time in the year.
Caution should be used in claiming a high ratio of home use (>49%), as this may put the “principal residence” capital gains exemption of your home at risk. Similarly, CCA expense savings can be clawed back by the CRA on a later sale of your home, and thus should be used thoughtfully.
In summary, significant tax savings may be possible.