Working From Home: When Can Employee Expenses Be Deducted?

Update on October 27th, 2020

Many Albertans are trying to figure out the balance between working from their home work spaces and in the office as the economy opens up but with COVID-19 continuing to spread in the community. With this shift, employers may see increased questions regarding employee home-based reimbursements, whether employee allowances and reimbursements related to home offices and working from home are taxable, and queries regarding when an employee may deduct certain home office expenses from their employment income.

Allowances and Reimbursements

Allowances are typically a flat amount provided to an employee for a specified purpose, such as for the costs of meals or travel spent to meet with clients. These are usually considered a taxable benefit of the employee and deductible for the employer so long as it is a reasonable business expense.[1]

Reimbursements are payments to an employee for out-of-pocket costs. Again, these are typically for a specified purpose, such as for work supplies. Whether reimbursed expenses are taxable to the employee is a question of fact: they will not be a taxable benefit to the employee only if they primarily benefit the employer. Even if they are taxable to the employee, these expenses are deductible for the employer so long as it is a reasonable business expense. Employers will require receipts to substantiate the out-of-pocket costs before they reimburse the employee.

Whether an expense primarily benefits the employer is a question of fact so, unless the Tax Court or CRA has specifically addressed the question, it will be difficult to be 100% certain whether an expense reimbursement is taxable. However, the CRA has stated that a reimbursement up to $500 to an employee who is working away from the office to acquire personal computer equipment or office furniture (desk, chair, etc.) during the COVID-19 pandemic could be a non-taxable benefit. It would be a non-taxable benefit if the equipment allowed the employee to properly perform their employment duties away from the office, as the CRA agreed this meant the equipment is primarily for the benefit of the employer.[2]

Allowances are administratively simpler since it is a set amount for each employee. However, this may result in an overpayment to employees if they actually do not use the entire amount for the intended purpose. Reimbursements require more administration and paperwork since employees must submit receipts and employers must review and confirm the receipted expenses are valid employment and business expenses. However, there may be expenses that can be reimbursed and not trigger a taxable benefit, while an allowance covering the same amount would be taxable.

Employee Deductions

Section 8 of the Income Tax Act (“ITA”) provides for deductions against income from an office or employment.

General

An employee may deduct certain employment expenses related to their employment so long as the employee is required under their employment agreement to pay such expenses and the employer is willing or has provided a signed T2200 form (Declaration of Conditions of Employment). Deductible employment expenses include supplies, cell phone plans (to the extent that the phone is used for employment purposes and such cost is reasonable), office rent, travel, etc.

Work space in Home (ITA 8(13))

In addition to deductible employment expenses, an employee may also deduct certain costs of a home office. If a home office qualifies as a “work space in home”, then the employee may deduct the proportionate amounts of utilities, relevant maintenance, property tax, and insurance. In determining the proportionate amount, a reasonable basis should be used (e.g. square space, number of rooms, etc.). An employee cannot deduct mortgage costs or depreciation of the home (capital cost allowance). An employee also cannot deduct the cost to lease or buy office equipment (such as computers, cell phone, fax machine) or tools (such as briefcase, calculator, etc.).

To qualify as a “work space in home”, the home office must be a work space that is either:

1. the place where the individual principally performs the duties of the office or employment; OR
2. a place used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment;

“Principally” means that the individual worked in the home office for more than 50% of his or her work. This is measured for each tax year, meaning temporarily working at home for a short period during the year would not qualify the individual.

Alternatively, a home office that is used exclusively for work purposes and used to regularly meet with customers/clients or others may also qualify as a “work space in home”. This test is also measured on a tax-year basis, meaning the temporary changes to meeting away from an employer’s office would not qualify.

Unfortunately, the CRA has historically taken the view that “meeting customers” requires face-to-face meetings. In 2009 and in 2013[3], the CRA confirmed in tax interpretations (which are not binding but are highly persuasive) that virtual meetings, such as through Skype, are not within the ordinary meaning of “meetings” or within the common law of same. However, a lot has changed in the last 7 years and, frankly, in the last few months. It’s unclear if the CRA will change its policy position now that thousands of Canadians are required to self-isolate and many more are encouraged to work from home, when possible.

Despite the fact that many temporary home offices may not qualify, it is worth considering these deductions. It would be naïve to think that the work environments will revert entirely back to what they used to be. Most likely, there will be an increase in the number of people working remotely. An employee may be able to meet the first test if he or she begins to work 3 days a week from home if his or her work week is usually 5 days. An employee may alternatively meet the second test, if the CRA changes its position on the meaning of “meetings”.

Commissioned Employee (ITA 8(1)(f))

In addition to the expenses deducted for a qualifying work space in home, commissioned employees can also deduct other expenses. A commissioned employee:

1. is employed in connection with selling property or negotiating contracts of the employer;
2. was under the contract of employment was required to pay the taxpayer’s own expenses;
3. was ordinarily required to carry on the duties of the employment away from the employer’s place of business;
4. was remunerated in whole or part by commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated; and
5. was not in receipt of an allowance for travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer’s income.

A commissioned employee may deduct a variety of expenses related to their employment, including home office expenses, advertisements, promotional costs, entertainment and meals (must be away from metropolitan of the employer), travel and vehicle costs, lodging, parking, etc. Also, if the employee is commissioned, then he or she may deduct the cost of leases for office equipment (but not the cost to buy such equipment).

Note, travel and vehicle costs can also be deducted pursuant to ITA 8(1)(h) and (h.1). Employees can only claim either ITA 8(1)(f) or ITA 8(1)(h) and (h.1) therefore the employee should consider which would yield the best deduction in their specific situation.

If you have further questions about taxable benefits or tax deductions, the McLennan Ross Tax Group would be happy to assist you

[1] Exceptions where the benefit may be non-taxable include reasonable travelling allowances, meal allowances during overtime worked, and certain moving allowances. None of the exceptions are likely to be of assistance when it comes to home offices.

[2] Tax interpretation 2020-0845431C6 and October 27, 2020, CTF Roundtable, Q13.

[3] Tax interpretations 2009-0337751I7 and 2013-0481171E5,