Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Can work-space-in-home expenses be determined on some other allocation basis than square meters?
Position: It is a question of fact.
Reasons: The determination of whether an expense is incurred to earn income, and whether it is reasonable, can only be made after reviewing all of the facts and documentation on a case by case basis.
XXXXXXXXXX
2010-037910
Brenda White
519-645-5454
November 16, 2010
Dear XXXXXXXXXX :
Re: Work place at Home Expenses
This is in response to your letter of August 24, 2010 and a phone conversation on November 4, 2010 wherein you asked for clarification regarding the allocation of personal and business electrical usage for the work space in home expense calculation.
In the situation described, you will be installing an energy sensor and monitoring system (the "System") that is expected to allow real time sensing, recording and data storage of electrical energy use in both your home and office area. You have asked if this is a reasonable method for apportioning the electrical usage between business and personal use.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
The determination of whether home office expenses may be claimed and what are reasonable business expenses are questions of fact. A review of all the facts surrounding a particular situation would need to be undertaken to verify a particular claim. The CRA's general position on work space in home expenses is discussed in Interpretation Bulletin IT-514 - "Work space in home expenses".
Pursuant to paragraph 18(12)(a) of the Income Tax Act (the "Act"), reasonable expenses related to a self-contained domestic establishment in which an individual resides may be deducted in calculating an individual's income from a business for a taxation year only if the work space is either (i) the principal place of the business of the individual, or (ii) used exclusively to earn business income and on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business. Our comments are based on the assumption that you are carrying on a business and that you meet one of the foregoing prerequisites.
As noted in paragraph 4 of IT-514, the expenses should be apportioned between business and non-business use on a reasonable basis, such as, square meters of floor space used. Very limited information has been provided about the System, but where the accuracy of the data it provides can be verified, it is possible that it would provide a reasonable basis for the allocation of work space expenses related to electrical usage.
Note however, that in order to be reasonable, the calculation should also take into consideration any personal use of the work space. As indicated in Chapter 3 of Guide T4002 "Business and Professional Income," where part of a home is used for both business and personal living, you should calculate how many hours in the day you use the rooms for your business, then divide that amount by 24 hours. Then, by multiplying the result by the business portion of the home expenses, you will be able to reasonably determine the business portion of an expense.
An individual who carries on a business in a work space, and has met the test in subsection 18(12) of the Act, will be able to deduct only the expenses related to the work space to the extent they are otherwise deductible and do not exceed the income from the business for the taxation year, carried on in the home or elsewhere, determined prior to deducting the expenses related to the work space. Thus, such expenses for a taxation year cannot create or increase a loss for income tax purposes from the business for which the work space is used. The portion of the otherwise deductible expenses related to a work space that cannot be deducted in a taxation year will be considered an expense related to the work space in the immediately subsequent taxation year. An indefinite carry forward is provided as long as either of the conditions of subsection 18(12) of the Act are met on a continuous basis.
We trust these comments will be of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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