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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
(i) Can an individual deduct home office expenses from rental income if it is considered business income?
(ii) What if the rental income is property income?
(iii) Since subsection 18(12) of the Income Tax Act indicates that it applies "in computing an individual's income from a business," does this imply that it does not apply in computing an individual's income from property?
(iv) Does it apply to a corporation?
Position:
(i) Subject to the restrictions in subsection 18(12).
(ii) Subject to the general provision relating to the deduction of expenses.
(iii) Subsection 18(12) does not apply.
(iv) No.
Reasons: The preamble to subsection 18(12) states that it applies "in computing an individual's income from a business."
XXXXXXXXXX 2001-012002
J. Gibbons, CGA
March 19, 2002
Dear XXXXXXXXXX:
We are replying to your letter dated January 16, 2002, in which you raised several questions concerning the deduction of home office expenses against rental income.
As requested, we have considered your questions and have provided our views. However, our comments are of a general nature only since we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4.
Hypothetical Facts
? Mr. A has a rental property and claims rental income on his personal income tax return.
? Mr. A uses a room in his home to do the rental property's accounting during the year (e.g., pay bills, record receipts and payments, etc.).
Questions:
1. Can Mr. A deduct home office expenses if the rental income is business income? What if the rental income is property income?
2. Since subsection 18(12) of the Income Tax Act (the "Act") indicates that it applies "in computing an individual's income from a business," does this imply that it does not apply in computing an individual's income from property? Does it apply to a corporation?
Under section 9 of the Act, income for a taxation year from a business or property is the taxpayer's profit from that property for the year. The income so determined is subject to a number of specific provisions in the Act which serve to expand or limit the scope of income and expenses for income tax purposes. By virtue of paragraph 18(1)(a), an outlay or expense must be made or incurred for the purposes of gaining or producing income to be deductible in computing income from a business or property. Under paragraph 18(1)(h), personal or living expenses of the taxpayer, other than expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business, are prohibited. Finally, even if an expense is otherwise permitted by the Act, an outlay or expense may be may be denied pursuant to section 67, to the extent that it is not reasonable in the circumstances.
Subsection 18(12) limits the deduction for the cost of an office in the home in calculating an individual's business income. Accordingly, if an individual's rental operation is considered a business, the rules in subsection 18(12) of the Act will apply to the cost of a home office.
Since there is no specific provision in the Act dealing with the deduction of home office expenses against property income, such deductions are subject only to the general provisions of the Act outlined above. In general terms, if a taxpayer can show that a home office was used in the course of earning rental income, it is our view that a reasonable basis for determining the deduction of home office expenses would have to be used, e.g., the square metres of floor space used for the home office. The basis used would have to take into account the personal use, if any, of the home office.
Similarly, the provisions of subsection 18(12) do not apply to corporations. Thus, the deduction of expenses incurred by a corporation that relate to its business use of a home office would be subject to the same general rules outlined above for the deduction of all business or property expenses.
We trust that these comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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