Claiming Expenses as a Business Owner

Home based businesses receive some favorable tax treatment by the Canada Revenue Agency. If you are self-employed or a sole proprietor and your principle place of business is your home, you may deduct a portion of your home expenses from your business profit.  These deductions include:

• Rent or Mortgage interest
• Insurance
• Utilities
• Property taxes
• Maintenance fees

In order to calculate the amount you can deduct from your tax bill you will need to make the following calculation:

Divide the square footage you use for your business (A), by the total square footage of your home (B), then multiply this by the amount of allowable expenses (C).

Therefore (A/B) x C = the amount you can deduct

For Example:

Your home office is 100 square feet and your home totals 980 square feet.  You have a monthly rent bill of $2,000 and Utilities costing a further $200 per month.  Your calculation would be:

(100/980)x 2200 = $228.49

That $228.49 is therefore the deductible from your tax bill for that month.  Total these monthly amounts at the end of the year to find the yearly deductible, when it’s time to submit your taxes.

Home office expenses are claimed through the same T2125 form you submit for all other income and business expenses.  More information can be found in the CRA’s website and on pages 29 and 30 of the CRA’s Business and Professional Income Guide.

Claiming Expenses for Your Personal Living Space

If you are also using your personal living space for your business, there may be some additional deductions that apply.  One example would be if you are running a child care operation out of your home where the children use a designated play area plus the living room and kitchen.  In this case, you would calculate many hours of the day that area is used for the business.

For Example: 

The living room and kitchen are used between 7am and 7pm, Monday to Friday.  This would equate to 37.5% of the time that the home is used by the child-care operator to provide child care services.

The living room and kitchen are 400 square feet and the house is 2000 square feet.  The total cost of hydro, insurance and rent is $15,000 per year.  The deduction available would be 400/2000 x 37.5% x $15,000 = $1,125.

Claiming Expenses when Operating at a Loss

It is important to note that if the business is operating at a loss prior to deducting office in home expenses, then you are not allowed to deduct any money from your bill. In other words, you do not increase your loss by claiming office in home expenses.  However, you should still calculate the deduction and include it on your tax return, as the amount can be carried forward until you are operating at a profit and then deducted from your tax bill.

For Example:

If office in-home expenses total $1,200 for both 2011 and 2012 and the business has a loss of $100 in 2011 but a profit of $5,000 in 2012, the loss to be reported on the 2011 return is $100 and the income for 2012 is $2,600 ($5,000-$1,200-$1,200).

Finding the Appropriate Deductions

Claiming appropriate tax deductions is an important part of tax planning and maximizing your financial position, so be sure to discuss all the opportunities available to you with a qualified tax professional.