How to prepare for audits over home office expenses

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After three years with a simplified filing method, the process for claiming home office expenses became more complicated for the 2023 taxation year.martin-dm/iStockPhoto / Getty Images

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Working from home and claiming home office-related expenses became a little trickier this tax season. Now, with most taxes filed and the deadline approaching for self-employed workers, are Canadians likely to see more audits this year for work-from-home expenses?

During the COVID-19 pandemic, the Canada Revenue Agency (CRA) rolled out a temporary flat-rate method for claiming home office expenses. It allowed taxpayers who worked from home more than 50 per cent of the time for at least four weeks in the year to claim $2 for each day they worked at home, for a maximum of $400 in 2020 and $500 in 2021 and 2022.

But with pandemic restrictions removed, those who worked from home had more onerous filing requirements for their 2023 taxes. Those claiming work-from-home expenses needed their employer to sign their T2200 form, (Declaration of Conditions of Employment) and fill out Form T777 – Statement of Employment Expenses.

Edward Rajaratnam, partner, global employment tax services with Ernst & Young Global Ltd. in Toronto, says it’s too early to determine whether the CRA will audit individuals new to reporting home office expenses. Although he says it’s unlikely, he believes claiming the expenses might trigger a closer look at that person’s taxes.

“What the CRA will do is it will reassess the tax return – this is called a post assessment,” he says.

That will require the taxpayer to provide supporting documents, a completed T2200 form from their employer and, if anything is amiss, pay a penalty.

“It’s a risk – and a lot of people don’t want to be on the CRA’s radar,” he says.

Mr. Rajaratnam and other tax experts pointed to specific elements of home-office expenses that could be examined.

Allowable office supplies: The CRA’s website is exhaustive in what’s covered for allowable office expenses, says Evelyn Jacks, president of Knowledge Bureau Inc. and a tax services specialist in Winnipeg.

“It’s long, detailed and very specific, and you will be surprised at the kinds of things they allow or don’t allow,” she says.

While folders, ink cartridges, paper clips, postage and sticky notes are allowed, computer supplies such as monitors, keyboards, mouses, lamps and microphones aren’t. She says reviewing the list of items will let employees know where they stand.

Size of workspace: The workspace in the home is “where some people may try to push the limit a little bit,” says Daniel LeBlanc, portfolio manager and chief financial officer at Verecan Capital Management Inc. in Dartmouth, N.S.

“If you have a 2,000-square-foot home and you have a dedicated office space that’s 200 square feet, [then] 10 per cent of your total square footage of the home would be dedicated office space,” he says.

The number of hours the space is used for work also affects the amount of expenses that can be claimed. For a designated room, as in the example above, the calculation is simple: with a 40-hour work week, 100% of the time can be claimed for that space.

It’s more complicated for someone who works from their kitchen table. In that case, a 40-hour work week is divided by 168 hours total hours in a week and multiplied by 100 for the percentage of time – 23.8 per cent – that can be claimed for the work space, according to the CRA.

Employee versus self-employed: Self-employed, employed and commission employees can claim home office expenses, although what each group can claim differs. All groups can claim a portion of rent, heat, water, home internet access fees, maintenance and minor repair costs, and the utilities portion of condominium fees.

Salaried employees and commission employees can’t claim mortgage interest, principal mortgage payments, furniture or capital expenses such as flooring, according to the CRA. While salaried employees can’t claim home insurance, property taxes or the lease of a cell phone, computer, laptop, tablet or fax machine, commission employees can claim these items.

Ms. Jacks says self-employed Canadians have the most flexibility in terms of home office expenses. They can claim their home-office portion of utilities, maintenance costs and office supplies, as well as rent, home insurance, property taxes and mortgage interest, but not the principal part of mortgage payments.

Have receipts ready

The burden of proof is on the claimant, Ms. Jacks says. As a result, she suggests keeping all receipts in hard copy, as well as having scanned copies in a digital folder.

“The likelihood of the CRA going back further than three years is unlikely on a review of a particular item, but they do suggest keeping seven years’ worth of data,” Mr. Leblanc says. “Keep up-to-date records.”

He says many people estimate how much they’ve spent on items such as utilities, which can backfire. “If you do those kinds of things and end up at a lower amount, they’ll reassess you,” he says of the CRA, and the taxpayer may be flagged for more frequent reviews.

In certain situations, it might not be worth it to make a claim. For some, gathering paperwork and keeping receipts is too onerous for the amount they’ll get back, Mr. Rajaratnam says.

“Some people say, ‘I don’t want the CRA to come after me for $150,’” he says. “‘Even though I’ve been working from home, I don’t want to open up a can of worms.’”

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