S4-F2-C2, Business Use of Home Expenses

Introduction

The purpose of a Chapter History page is to highlight any amendments to the information contained in an interpretation bulletin that is now reflected in a chapter of an income tax folio as well as to identify any subsequent amendments to a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.

Update February 1, 2017

General

Income Tax Folio S4-F2-C2, Business Use of Home Expenses, replaces and cancels Interpretation Bulletin IT–514, Work space in home expenses.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.

Legislative and other changes

¶2.1 and 2.2 have been added to highlight various provisions that must be satisfied in order for an individual to deduct business use of home expenses.

¶2.5 has been added to preliminarily state that expenses satisfying the requirements in paragraph 18(12)(a) are deductible, subject to certain restrictions which are outlined later in the Chapter.

¶2.6 (formerly included in ¶1 of IT-514) has been expanded to provide examples of establishments that will and will not ordinarily be considered a self-contained domestic establishment.

¶2.7 - 2.9 have been added to discuss the CRA’s view of the application of subsection 18(12) to bed and breakfast operations.

Example 1 (formerly included in ¶2 of IT-514) has been revised to remove the supplemental example provided regarding a farmer’s principal place of business and to add an example of a personal use of a work space.

Example 2 has been added to provide an example of a work space that would not be considered an individual’s principal place of business.

¶2.14 and 2.15 (formerly included in ¶3 of IT-514) have been expanded to discuss the meaning of the terms meet and meetings and regular and continuous for purposes of subparagraph 18(12)(a)(ii).

¶2.17 (formerly included in ¶4 of IT-514) has been expanded to include reference to maintenance costs, minor repairs and the civil law concept of a hypothec.

¶2.18 (formerly included in ¶4 of IT-514) has been revised to replace the words “square metres of floor space used” with “the area of the work space divided by the total finished area of the home (including areas such as hallways, bathrooms and kitchen)”, as an example of a reasonable basis in which to apportion expenses between business and non-business use. The paragraph has been expanded to note that other allocation methods may also be considered reasonable for purposes of apportioning expenses.

¶2.19 has been added to clarify the circumstances in which a work space in the home may be used for personal purposes in view of the requirements in paragraph 18(12)(a).

Example 3 has been added to provide an example of a reasonable apportionment of expenses where a work space in the home is used exclusively for business purposes.

¶2.20 has been added to provide information regarding the apportionment of expenses where a work space in the home is also used for personal purposes.

¶2.21 has been added to provide information regarding the deductibility of rent expense as a business use of home expense.

¶2.22 - 2.27 have been added to provide information regarding the deductibility of interest on a mortgage or hypothec as it relates to a work space in the home.

¶2.28 and 2.29 have been added to provide information regarding the treatment of maintenance costs and minor repairs as a business use of home expense.

¶2.30 has been added to provide examples of the types of expenses that are not deductible as a business use of home expense.

¶2.31 has been added to provide information regarding the treatment of outlays on account of capital as a business use of home expense.

¶2.32 (formerly included in ¶4 of IT-514) has been revised to provide additional examples of expenses that do not relate to a work space.

¶2.33 has been added to provide information regarding the deductibility of costs relating to telephone and internet service.

¶2.34 - 2.36 have been added to discuss the treatment of personal or living expenses for tax purposes generally as well as specifically in the context of a business use of home expense.

¶2.37 (formerly included in ¶4 of IT-514) has been revised pursuant to the amendment to paragraph 18(12)(b), as implemented by S.C. 1996, c. 21, s. 5(2), applicable to the 1995 and subsequent tax years. This amendment to paragraph 18(12)(b) added a reference to sections 34.1 and 34.2 to address matters concerning the computation of income of entities with an off-calendar fiscal period. Subsequently, section 34.2 was amended by 2011, c. 24, s. 3(1), applicable to tax years ending after March 22, 2011. As it now applies, section 34.2 is not relevant to paragraph 18(12)(b). Reference to section 34.2 is therefore intentionally omitted from ¶2.37 - 2.39 with respect to the restriction on deduction in paragraph 18(12)(b).

¶2.39 has been added to very broadly describe the relevance of section 34.1 as it relates to paragraph 18(12)(b).

¶2.40 (formerly included in ¶5 of IT-514) has been revised to briefly describe the purpose of paragraph 18(12)(c).

¶2.42 (formerly included in ¶5 of IT-514) has been revised to provide further information regarding the carry forward and deduction of business use of home expenses.

Examples 4 and 5 have been added to demonstrate how certain concepts described in ¶2.37 - 2.42 would apply in a hypothetical scenario.

¶2.43 - 2.44 have been added to provide information regarding the potential capital gains tax implications of converting a portion of a principal residence to an office or workspace to use for the purpose of earning income from a business.

¶2.45 and 2.46 have been added to clarify that subsection 18(12) does not apply to limit the deduction of expenses incurred to earn non-business income from property.