13 December 2007 External T.I. 2007-0227511E5 - Workspace in Home

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: 1) Is an annual payment a Bonus or Commission? 2. Does the employer have to ensure the conditions are met before signing Form T2200? 3) How should the 50% principal use condition be determined, specifically, which total hours should be used, the standard workweek or otherwise?

Position: 1) Question of fact. However, in this case, the payment appears to be a bonus. 2) In order for an employee to claim a deduction for home office expenses under either paragraph 8(1)(f) or (i) of the Act, a completed form T2200 is required. Subsection 8(10) of the Act indicates that by signing the form, the employer certifies that the employee meets the conditions set out in the provisions described above. It follows that the best course of action is for the employer to be reasonably certain the employee meets the conditions before signing Form T2200. For the employee to claim the deduction, however, he or she must be able to demonstrate that the requirements of the Act have in fact been met. 3) Although the term "principally" is not defined in the Act, the CRA has accepted the view that it means "more than 50% of the time". With respect to the appropriate "total hours" to use to determine this percentage, it is our view that it would be reasonable to begin with the number of hours that the employee is required to work under the terms of his or her employment contract. Depending on the particular facts, it may be that an employer approves overtime or different working hours, which would have an impact on this calculation. Such a determination involves a finding of fact in each case as to where a particular individual "principally performs the duties of the office or employment".

Reasons: Reading of the legislation and consistent with prior positions.

							2007-022751
XXXXXXXXXX 						J. Bertram, B.Comm,
							CGA, CPA (vt)
(613) 957-8954
December 13, 2007

Dear XXXXXXXXXX ,

Re: Employee Workspace in the Home

We are writing in response to your March 21, 2007 request for an interpretation regarding the deductibility of employees' expenses related to workspace in the home.

You indicated that the employees in question are salaried sales representatives who are eligible to receive an annual payment based on the performance of the company and the particular employee. The individual must be an active employee at the time of the payment in order to be eligible to receive it. Since employee offices are not available at the corporate facilities, the expectation is that certain administrative duties will be carried out at home. However, employees are not required by the company to maintain an office in the home. In fact, upon request, the company will pay for offsite storage lockers for employees to store supplies and sales materials. Generally, these employees are expected to spend 80 to 90 percent of their scheduled 37.5-hour workweek on the road, meeting with customers and the remainder completing administrative tasks. It is possible that some employees may spend several additional unpaid hours on administrative matters.

Based on the facts above, you requested our opinion as to how you should respond to question 10 on Form T2200 for these employees.

Our comments:

The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to 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. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSO's is available on the "Contact Us" page of the CRA website.

Whether an employee is eligible for a deduction relating to home office expenses is a question of fact, which must be determined on a case-by-case basis. However, we can provide the following comments, which may be of assistance. The CRA's view on home office expenses is explained in Interpretation Bulletin IT-352R2, "Employee's Expenses, Including Work Space in Home Expenses". Generally, expenses relating to a workspace in the home can be claimed by a taxpayer under either paragraph 8(1)(f) or 8(1)(i) of the Act, subject to meeting the additional conditions in subsection 8(13), which will be described below.

In order to deduct home office expenses under the authority of paragraph 8(1)(f) of the Act, a taxpayer must be employed in connection with the selling of property or the negotiation of contracts for his or her employer, must be required under the contract of employment to pay his or her own expenses and must be remunerated in whole or in part by commissions referenced by volume of sales. It is a question of fact whether a particular payment constitutes a commission or something else, such as a bonus.

In order to assist you with your factual determination, we note that the CRA has expressed the opinion that a bonus is an amount in addition to the employee's normal remuneration that may be paid in recognition of achieving certain performance objectives, including the achievement of specific sales targets. Accordingly, such a payment is a bonus, not a commission. It is considered significant if an individual is not entitled to receive the bonus unless he or she is an active employee at the time of the payment. This requirement indicates that the payment is in addition to the employee's ordinary remuneration as opposed to a commission that the employee has earned and would be legally entitled to receive irrespective of the person's employment status at the time of the payment.

If an individual is not remunerated by commissions, he or she may be entitled to a deduction for home office expenses pursuant to paragraph 8(1)(i). However, this paragraph limits the types of deductions permissible to supplies consumed and office rent paid in accordance with the terms of the employment contract. In practical terms, in addition to expenses related to typical office supplies, this provision would permit the deduction of a reasonable proportion of expenses paid by the individual for the maintenance of the home, such as the cost of fuel, electricity, light bulbs, cleaning materials and minor repairs. These latter expenses should be apportioned between the employment use and the non-employment use of the home on some reasonable basis, such as square metres of floor space used. An employee living in rental accommodation would be entitled to a deduction for a proportionate amount of both the rent and utilities paid in respect of the employee's living accommodation. Note as well that an employee who owns his or her own home cannot deduct the equivalent rental value of the portion of the premises used for the office. Furthermore, paragraph 8(1)(i) of the Act does not permit the deduction, as home office expenses, of mortgage interest, property taxes, insurance, or capital cost allowance. A reasonable portion of property taxes and insurance paid can only be claimed by commission sales employees who are entitled to claim expenses under paragraph 8(1)(f) of the Act.

Home office expenses otherwise deductible under paragraph 8(1)(f) or 8(1)(i) are prohibited under subsection 8(13) of the Act, unless the individual either (i) principally performs the duties of the office or employment in the work space, or (ii) the work space is used exclusively 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.

We gather that the employees in question would not satisfy the criteria in (ii) above, but you are uncertain how to interpret the requirements of (i). Although the term "principally" is not defined in the Act, the CRA has accepted the view that it means "more than 50% of the time". With respect to the appropriate "total hours" to use to determine this percentage, it is our view that it would be reasonable to begin with the number of hours that the employee is required to work under the terms of his or her employment contract. Depending on the particular facts, it may be that an employer approves overtime or different working hours, which would have an impact on this calculation. Such a determination involves a finding of fact in each case as to where a particular individual "principally performs the duties of the office or employment". Where the individual meets the test in either (i) or (ii) above, he or she will be able to deduct the expenses related to the work space only to the extent they do not exceed the income for the year from the office or employment as determined before deducting these expenses. Thus, such expenses cannot create or increase a loss for income tax purposes from the office or employment. Unused amounts may be carried forward.

In order for an employee to claim a deduction for home office expenses under either paragraph 8(1)(f) or (i) of the Act, a completed form T2200 is required. Subsection 8(10) of the Act indicates that by signing the form, the employer certifies that the employee meets the conditions set out in the provisions described above. It follows that the best course of action is for the employer to be reasonably certain the employee meets the conditions before signing Form T2200. For the employee to claim the deduction, however, he or she must be able to demonstrate that the requirements of the Act have in fact been met.

We trust the above will be of assistance to you.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch