Working from home? Tax considerations for home-office expenses and province of employment

During the pandemic, most of the world saw a substantial increase in employees working from home. Canada was no exception. According to Statistics Canada, by April 2020, about 40% of Canadians worked from home. By the end of 2023, the number of people working remotely decreased to about 20%, which is a much higher percentage compared to the data from 2016, when only 7% of Canadians worked from home.

In response to this change, the Canada Revenue Agency (CRA) initially introduced a temporary flat rate method to simplify claiming the deduction for home office expenses for the 2020 tax year. The flat-rate home-office expense deduction continued for the 2021 and 2022 tax years, where a taxpayer could claim $2 per day worked from home, up to a maximum of $500, as a deduction (the maximum deduction was $400 in 2020). Taxpayers did not need to present  receipts or proof of expenditures and no form was required by the CRA to be included with one’s tax filing.

Alternatively, taxpayers were still able to claim deductions by obtaining a completed and signed Form T2200 – Declaration of Conditions of Employment from their employer in a process like the traditional detailed method for deducting home office expenses, with the sole exception that the number of eligible expenses was expanded to include reasonable costs for home internet.

In late 2023, the CRA announced that simplified method of claiming home office expenses would no longer be available for the 2023 tax year, both for those working from home full-time or on a hybrid home-office work arrangement. Employees claiming expenses related to working from home will now be required to calculate all their expenses, prorate them, and then claim the appropriate amount as a deduction on their 2023 tax returns.

In January 2024, the CRA issued an updated version of Form T2200 for the 2023 taxation year, with the goal of making it easier for employers to complete in cases where the employee is only seeking to claim a deduction for home office expenses. Further, the CRA will accept an electronic signature on this form.

Eligibility and Deductible Expenses

The CRA has provided the following guidelines when determining the eligibility for home office expenses for employees:

• When an employee has voluntarily entered a formal telework arrangement with their employer, the employee is considered to have been required to work from home. A written or verbal agreement between the parties is a requirement;
• The employee was required to pay for expenses related to the workspace in their home, and the expenses have not been reimbursed by the employer; and
• The workspace is where the employee worked more than 50% of the time for a period of at least four consecutive weeks in the year. Alternatively, the workspace may only be used to earn employment income, and it must be regularly used for in-person meetings with clients, customers or other people while working.

An employee who works from home for only part of the year may only claim expenses for that part of the year. Similarly, part-time employees may claim home office expenses when working from home for more than 50% of the time for a period of at least four consecutive weeks of their regular work schedule.

An employee who meets the eligibility criteria may then claim a portion of certain expenses related to the use of a workspace in their home. Eligible expenses include electricity, heat, water, utilities portion (electricity, heat, and water) of condominium fees, home internet access fees, maintenance and minor repair costs, and rent paid for a house or apartment. Commission employees who sell goods or negotiate contracts may claim some expenses that salaried employees cannot, such as home insurance, property taxes and the costs to lease a cellphone, computer, laptop, tablet, fax machine, etc., so long as they reasonably relate to earning commission income.

It is important to point out that both salaried and commission employees cannot claim mortgage interest, principal mortgage payments, home internet connection fees, furniture, or capital expenses (replacing windows, flooring, furnace, etc.).

The taxpayer needs to determine the surface of the house, apartment, or condominium used as workspace by calculating the size of said workspace relative to all finished areas. Once the percentage of the home used as a workspace has been determined, said percentage is then applied to the eligible expenses and the result is the portion of these expenses that can be claimed as home office deduction. Expenses related to a specific part of a home that was not used as a workspace cannot be included in the calculation.

 Further, if the workspace is a shared area used for work and personal use, or if it is shared by more than one person who works from home and these persons meet the eligibility criteria, additional calculation will be necessary to reduce the eligible percentage of home-office expenses that may be claimed or each individual will need to decide which expenses to claim, as each expense may only be claimed once.

Determining the Province of Employment

A new CRA administrative policy, which became effective on January 1, 2024, is meant to provide guidance to employers when determining the province of employment (POE) for individuals working remotely. Employers must take an employee’s POE into consideration for the purposes of Canada Pension Plan, Employment Insurance and income tax deductions.

The POE depends on whether the employee reports to work at an establishment of the employer. An employee who is a resident of Canada is considered to be reporting for work at an establishment of the employer if one of the following applies: (i) the employee reports for work physically at the establishment, in which case there is no minimum amount of time the employee has to report to that place; or (ii) where a full-time remote work agreement was made, the employee may be reasonably considered "attached to an establishment of the employer."

The CRA considers a full-time remote work agreement to exist between the employer and the employee when the parties have made such agreement allowing the employee to work 100% of their time remotely and the employment duties are performed at one or more locations that are not establishments of the employer. The agreement may be either temporary or permanent, meaning that it can be for a limited time, as long as the employee works remotely full-time for the duration of the agreement.

Once it has been determined that a full-time remote work agreement is in place, the next step for an employer is to determine whether the employee is reasonably considered to be “attached to the establishment of the employer.” The POE will be the province or territory of that establishment.

The primary indicator to determine if an employee can reasonably be considered "attached to an establishment of the employer" is whether the employee would physically come to work to carry out the functions related to their employment duties at that establishment, if it was not for the full-time remote work agreement. For employees who physically reported to an establishment of the employer immediately before entering a full-time remote work agreement, that establishment is the one to which they would be reasonably considered to be attached, unless the employee's circumstances or the nature of their duties have changed.

The following secondary indicators can assist in determining the establishment of the employer where the employee, if it was not for the full-time remote work agreement, would physically come to work to carry out the functions related to their employment duties:

1. The establishment where the employee attends or would attend in-person meetings, through any type of communication.
2. The establishment where the employee receives or would receive work-related material or equipment or associated instructions and assistance.
3. The establishment where the employee comes or would come in-person to receive instructions from their employer regarding their duties, through any type of communication.
4. The establishment that is responsible for or supervises the employee, as indicated in the contractual agreements between the employer and the employee.
5. The establishment to which the employee would report based on the nature of the duties performed by the employee.

All the indicators listed above need to be reviewed together to determine whether the employee is reasonably considered to be “attached to an establishment of the employer.”

The CRA further clarified that in order to be considered reasonable, the determination that the employee is attached to an establishment based on the indicators above must be supported by the facts of the employee’s employment situation. This determination cannot be used to avoid source deductions or employer contributions in a province or territory.

In cases where an employee can be reasonably considered attached to more than one establishment of the employer, the same indicators should be used to determine to which establishment of the employer the employee can be reasonably considered as more closely attached.

Fillmore Riley LLP's Taxation Practice

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