23 October 2007 External T.I. 2007-0228011E5 - workspace in home expenses

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 employees deduct expenses related to home offices?

Position: Question of Fact

Reasons: General information provided

XXXXXXXXXX 								2007-022801

October 23, 2007

Dear XXXXXXXXXX:

Re: Subsection 8(13) - Home Office Deduction

We are writing in response to your letter of March 16, 2007 inquiring about the deductibility of work space in home expenses of sales representatives employed by your company. We apologize for the delay in responding.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. 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 transaction that has already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs 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 general comments, which may be of assistance.

The CRA's general views regarding work space in home expenses are outlined in Interpretation Bulletin IT-352R2, "Employee's Expenses, Including Work Space in Home Expenses." To be deductible from employment income, an expense must be specifically listed in section 8 of the Income Tax Act (the "Act"). Work space in home expenses may be deducted only under certain circumstances and within certain limits. Where an individual is employed in a year in connection with the selling of property or negotiation of contracts for the individual's employer, a deduction pursuant to paragraph 8(1)(f) of the Act may be claimed in respect of amounts expended in the year for the purpose of earning employment income. With respect to workspace in home expenses, the relevant requirements of paragraph 8(1)(f) of the Act include the following:

• the contract of employment required the employee to pay the expenses so incurred,
• the employee was ordinarily required to carry on the duties of employment away from the employer's place of business, and
• the employee was remunerated in whole or in part by commissions or other similar amounts fixed by reference to the volume of the sales made.

Furthermore, the expenditures cannot have been outlays, losses or replacements of capital or payments on account of capital, except capital cost allowance and interest deductible under paragraph 8(1)(j) of the Act.

Although paragraph 8(1)(f) of the Act is frequently relied upon by commissioned sales people to deduct expenses related to a workspace in home, subsection 8(13) of the Act imposes further restrictions on the deductions that may otherwise be available. Such expenses are only permitted if the work space is either:

1. The place where the individual principally performs the office or employment duties, or

2. Used exclusively during the period to which the expenses relate to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.

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."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." The proportion of employment duties performed in the home offices of your employees, and whether they regularly meet customers there, are determinations that would be a question of fact particular to each taxpayer. Where an 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.

Form T2200, "Declaration of Conditions of Employment" is identified by subsection 8(10) of the Act as the prescribed form which must be signed by an employer in order for an employee to claim deductions for employment expenses under various provisions of the Act including paragraphs 8(1)(f). The words of subsection 8(10) of the Act indicate that by signing the form, the employer certifies that the required conditions set out in the provisions described above are met. 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 subsection 8(13) of the Act have in fact been met.

The role of the CRA is to administer and enforce the Act and Income Tax Regulations as enacted by Parliament. It is the role of the Department of Finance to consider changes to existing tax legislation. Therefore, any request to remove or amend the requirements of subsection 8(13) of the Act should be directed to that Department.

We trust that 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