5 January 2010 External T.I. 2009-0317611E5 - 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: Whether various expenses incurred by an employee and related to a workspace in the home are deductible employment expenses. More specifically, the expenses incurred are a second telephone line, an unlimited long distance plan, monthly internet access fees and gas, hydro and water charges.

Position: Pursuant to subparagraph 8(1)(i)(iii), the expenses incurred by a salaried employee for a second telephone line and a monthly internet access fees are not deductible but that portion of the cost for a telephone plan for unlimited long distance that reasonably relates to the earning of employment income is deductible. Pursuant to paragraph 8(1)(i), a reasonable proportion of expenses paid for the maintenance of the home such as the cost of fuel, electricity and water charges will be deductible.

Pursuant to subparagraph 8(1)(f), if all the preliminary requirements are met, all the enumerated expenses are deductible for an employee earning commission income.

Reasons: The expenses incurred for a second telephone line and monthly internet access fees are not deductible under 8(1)(i)(iii) as they are not supplies consumed directly in the performance of duties of employment. The cost for an unlimited limited long distance plan qualifies as office supplies consumed insofar as the expenses relate to employment-related calls. For the cost of fuel, electricity, the CRA's position is expressed in guide T-4044.

While some other provision of the Act may restrict the deduction (e.g. section 67), if it can be established that the expenses are paid by an employee in a taxation year for the purpose of earning income from a commission sales employment, and all the requirements of subparagraphs 8(1)(f)(i) to (iv) are met, paragraph 8(1)(f) would not specifically deny their deduction unless the amount represents a payment on account of capital.

XXXXXXXXXX 2009-031761
Anne Dagenais
January 5, 2010

Dear XXXXXXXXXX :

Re: Workspace in the home

This is in response to your e-mail dated April 14, 2009 with respect to whether various expenses related to a workspace in the home may be deducted as employment expenses. Specifically, you are enquiring about the expenses related to a second telephone line, an unlimited long distance plan, monthly internet access fees as well as gas, hydro and water charges.

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.

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. The CRA's views on home office expenses are explained in Interpretation Bulletin IT-352R2, "Employee's Expenses, Including Work Space in Home Expenses" ("IT-352R2"). 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 Income Tax Act (the "Act"), subject to meeting the additional conditions in subsection 8(13), which will be described below.

If an individual is not remunerated by commissions, home office expenses may be deducted pursuant to subparagraph 8(1)(i)(iii) of the Act, which is limited to the cost of supplies consumed directly in the performance of the employment duties. As stated in paragraph 1 of IT-352R2, such expenses are deductible if:

(i) the taxpayer is required by the contract of employment to provide such supplies;
(ii) the taxpayer has not been reimbursed and is not entitled to reimbursement for such expenses;
(iii) the expenses may reasonably be regarded as applicable to the earning of income from the office of employment; and
(iv) the supplies are consumed directly in the performance of the taxpayer's employment duties.

The CRA does not consider internet access fees to be supplies that could qualify for a deduction under subparagraph 8(1)(i)(iii) of the Act. Also, as indicated in paragraph 10(a) of IT-352R2, the cost of a second telephone line, even if used exclusively for work purposes, is considered non-deductible for the purposes of subparagraph 8(1)(i)(iii) of the Act. These expenses represent fixed costs which cannot be directly related to the use made in the performance of the duties of employment, and therefore failing the "supplies consumed directly" test. However, it is CRA's view that the cost of long-distance telephone calls and cellular telephone calls or the cost of an unlimited long distance plan that reasonably relates to the earning of employment income qualify as supplies under subparagraph 8(1)(i)(iii) of the Act. The expense related to the unlimited long distance plan should be apportioned between the employment use and the personal use on some reasonable basis.

Furthermore, in addition to expenses related to typical office supplies, paragraph 8(1)(i) of the Act will also authorize a deduction for a reasonable proportion of expenses paid by the individual for the maintenance of the home. As discussed in Chapter 3 of Guide T4044, "Employment Expenses," these expenses may include the cost of fuel, electricity, light bulbs, cleaning materials, minor repairs and water charges. 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. 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.

If an individual is remunerated by commissions, he or she may choose instead to deduct home office expenses under the authority of paragraph 8(1)(f) of the Act. Unlike subparagraph 8(1)(i)(iii), there is no requirement in paragraph 8(1)(f) that an expense relate to supplies consumed directly in the performance of the taxpayer's employment duties. Rather, this provision allows the taxpayer to claim a deduction for amounts expended in the year for the purpose of earning the income from such employment (not exceeding the commissions or other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated and received by the taxpayer in the year). The following requirements, outlined in subparagraphs 8(1)(f)(i) to (iv) of the Act, must be met:

(i) the taxpayer must be employed in connection with the selling of property or the negotiation of contracts for his or her employer,
(ii) the taxpayer must be required under the contract of employment to pay his or her own expenses,
(iii) the taxpayer must ordinarily required to carry on the duties of employment away from the employer's place of business and
(iv) the taxpayer must be remunerated in whole or in part by commissions referenced by volume of sales.

Furthermore, although a reasonable portion of property taxes and property insurance paid may be claimed by commission sales employees who are entitled to claim home office expenses under paragraph 8(1)(f) of the Act, deductions for capital outlays, losses or replacements of capital or payments on account of capital are explicitly denied. The expenses are also subject to the usual test of reasonableness.

In the case of internet fees, second telephone line fees, the cost of an unlimited long distance plan as well as gas, hydro and water charges, if it can be established that the fees were paid by an employee in a taxation year for the purpose of earning income from a commission sales employment, and all the requirements of subparagraphs 8(1)(f)(i) to (iv) are met, paragraph 8(1)(f) would not specifically deny their deduction. This would not be the case if the amount represents a payment on account of capital (for example, the cost of acquiring communications equipment such as a modem).

Home office expenses otherwise deductible under paragraph 8(1)(f) or 8(1)(i) of the Act are subject to additional requirements imposed by subsection 8(13) of the Act. Specifically, one of the following tests must be met:

(i) the employee principally perform the duties of the office or employment in the work space, or

(ii) the work space is used exclusively for the purpose of earning employment income and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing employment duties. The term "principally" is not defined in the Act but the CRA has accepted the view that it means more than 50% of the time.

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 employment income for the year 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.

We also note that 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 that the particular expenses were required to be incurred by the employee and that the employee meets the requirements of the particular provision in section 8 of the Act described above that authorizes the deduction. 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 that our comments are of assistance to you.

Yours truly,

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