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Tax Insights: Employee home office expenses during the COVID-19 pandemic ─ tax deductions

December 03, 2020

Issue 2020-38R

December 3, 2020 update: On November 30, 2020, Deputy Prime Minister and Minister of Finance Chrystia Freeland, presented the 2020 Federal Fall Economic Statement. The economic statement announced that the Canada Revenue Agency (CRA) will permit a simplified home office expense deduction for employees working from home in 2020 due to the COVID-19 pandemic. These employees will be allowed to deduct up to $400 (expected to be a per diem amount for the number of days working from home, up to this maximum), with no requirement to track or report detailed expenses. The CRA will generally not request that they provide a signed form T2200 from their employer. Further details will be announced by the CRA.

This may simplify the tax filing process for employees with modest eligible home office expenses. However, it is unclear whether employers will still be expected to provide a signed form T2200 to every employee who claims a home office deduction using the simplified method. Therefore, employers will need to be prepared to determine which of their employees fall into this category. While we await further details from the CRA, many issues and considerations on deducting home office expenses in 2020 that are discussed in this Tax Insights remain relevant. Both employers and employees should continue to consider them and prepare for the related compliance requirements. We will continue to keep you informed of any related tax authority announcements.

The remainder of this Tax Insights was published on November 26, 2020. It has not been altered to reflect the announcement made in the economic statement.

 

In brief

With so many employees working from their homes during the COVID-19 pandemic, the ability to deduct home office expenses on their 2020 personal income tax returns has become an important topic. Guidance from the Canada Revenue Agency (CRA) and Revenu Québec, including new or modified forms, is expected to clarify their positions on employee deductions for home office expenses and related matters, hopefully recognizing the unique circumstances brought about by the COVID-19 pandemic. 

This Tax Insights explores the existing income tax rules for home workspaces and recent administrative positions and discusses how employers and employees can prepare for the related compliance requirements. 

In detail

Home office expense deductions for employees

Current eligibility rules

Existing CRA guidance1 (which Revenu Québec generally accepts for Quebec personal income tax purposes) explains that an employee is allowed to deduct work‑space‑in‑the‑home expenses on their personal income tax return if:

  • the employee was required to pay the expenses under their contract of employment, and
  • one of the following conditions is met:
    • the workspace is where the employee principally (more than 50% of the time) performs their work
    • the workspace is used only to earn employment income, on a regular and continuous basis for meeting clients, customers or other people in the course of the employee’s employment duties

To confirm their responsibility for expenses under their employment contract, the employee must obtain from their employer a signed form T2200, Declaration of Conditions of Employment, which must be kept by the employee in the event of a CRA audit. For Quebec employees, a signed form TP-64.3-V, General Employment Conditions must also be obtained from the employer and submitted by the employee with their Quebec personal income tax return. The 50% threshold for performing the employee’s duties at home is generally calculated over the entire calendar year, or the relevant portion if employment began or ceased during the year. Based on previous CRA interpretations, meetings with clients, customers or other people must be in-person to qualify for the second condition.

PwC observes

A large majority of Canadian workplaces temporarily closed in March 2020 due to the COVID-19 pandemic. Although many began to reopen later in the spring and throughout the summer, a number of employers have done so with reduced capacity, to address physical distancing guidelines, and have allowed employees to choose whether, or the extent to which, they will continue to work from home. Under the current rules, employees who worked from their homes during the closure might not be able to deduct their home office expenses, because they will not meet the 50% performance of work from home condition over the full year, in spite of them being required to work from home 100% during the shutdown period.

An employee working from home would not likely meet the second condition in the existing rules (i.e. meeting with clients, etc. in their home workspaces), under the CRA’s general interpretation, given the public health restrictions on in‑person meetings and gatherings during the COVID-19 pandemic and the simple fact that most employees working from home typically would not be meeting with clients or customers there. Although, it could be argued that the CRA’s position that the rule requires a “physical” meeting is incorrect, and that video (or even simple telephone) “meetings” conducted by the employee from their home workspace should qualify.

The CRA is expected to provide guidance on how these requirements will apply for 2020, potentially relaxing the need to calculate the 50% threshold over the entire year and instead, interpreting it to cover the COVID-19 pandemic period only (or alternatively, the pandemic-related shutdown period when office spaces were required to close due to a mandatory public health order). Revenu Québec has already confirmed that an employee working from home during the pandemic will be considered to have met the 50% threshold for deducting home office expenses (assuming they did actually work from home more than 50% of the time during a certain period in the year). It is less clear whether expenses incurred under work-from-home arrangements would continue to qualify following an employer’s office reopening, when an employee had the option of returning to work but chose instead to continue working from home, because it could be uncertain whether the employee would be considered to have been “required” to incur those expenses as a condition of employment (this determination is further complicated where the employer had insufficient space to accommodate all employees, given physical distancing measures, or when the employee agreed to continue working from home for less than half the time each week).

Relaxing the eligibility rules for claiming home office expenses will allow many more employees to deduct home office expenses during the pandemic, which will in turn place an additional compliance burden on employers with respect to work-from-home certifications. While Revenu Québec has already published the 2020 version of form TP-64.3-V (section 3.6 now asks specific questions about working remotely and the form can now be signed electronically), the CRA has not yet confirmed whether they will require a completed form T2200 or perhaps a simplified version that will cover only work-from-home arrangements related to COVID‑19.

Although not required to issue forms T2200 and TP-64.3-V to employees, the employer is responsible for certifying the form’s contents if one is provided. Accordingly, the employer must ensure that the information disclosed in the form(s) is accurate. The current version of form T2200 requires the employer to confirm the approximate percentage of the employee’s employment duties that were performed at their home office, and the amount of any related expenses that have been reimbursed. Although it is anticipated that the CRA will either modify these questions (or provide a separate form covering only COVID-19 work-from-home arrangements) for 2020 to streamline or simplify the information requirements (similar to the approach taken by Quebec in its revised form TP-64.3-V), employers will need to consider whether they are able to properly certify whatever information is required, and undertake the related administration. When an employer is not prepared to attest to an employee having met the conditions to deduct home office expenses, or is unwilling to incur the necessary time and effort to accurately complete and certify the required form, the employee will not be permitted to claim the related income tax deductions.

As we await federal guidance, employers should begin to assess their:

  • employees’ eligibility for deducting home office expenses in 2020
  • capacity to prepare a significantly higher number of T2200 (and TP-64.3-V for Quebec employees) forms than in previous years
  • ability to communicate the requirements to their employees

Deductible expenses

Home office expenses that can be deducted by eligible employees, include rent, utilities, office supplies and minor repairs and maintenance costs related to the workspace, up to the amount of employment income remaining after all other employment expenses have been deducted. Employees earning commission income can also deduct from that income property taxes and home insurance related to the workspace. Expenses such as mortgage interest, capital cost allowance and the cost of equipment that is capital in nature (e.g. computers, printers, office furniture) cannot be deducted. Internet fees may be deducted for Quebec income tax purposes, but only if they are billed according to use – according to the CRA, no federal deduction is available for internet access expenses. Cellphone or “landline” phone charges are also not deductible, except for long distance charges for work-related calls.

Receipts for these expenses should be retained to support the deduction (in the event of a tax authority audit) and the amount of home expenses that are deductible as home office expenses must be calculated on a reasonable basis (e.g. square footage of the home workspace in proportion to the entire home), although expenses that are directly attributable to the home office would not generally be prorated (e.g. paint for a home office).

PwC observes

The CRA is not expected to expand the types of expenses that are deductible as home office expenses. Less clear is what specific guidance, if any, will be provided regarding the portion of home expenses that may be considered reasonably related to the use of the home for work purposes. Based on the CRA’s previous views, the “reasonable portion” should take into account the personal use, if any, of the workspace. For example, if an employee’s dining room (representing 200 square feet of the 2,000 total square footage of the home) was used as a makeshift home office each weekday from March 16 to December 31, 2020, but also used for family dining purposes during that period, the employee would need to determine a reasonable allocation of the total use of that room for employment purposes in the year (which might be approximately 59% of the total use over the full year, if its employment use during the work from home period represented, say, 75% of the total average weekly use in that period - calculated as 9.5 months/12 months x 75% + 2.5 months/12 months x 0% = 59%). In that case, 5.9% of the home’s annual expenses may be eligible for deduction as home office expenses (calculated as (200/2000) x 59%). If the home office was a dedicated workspace, instead of also functioning as the home’s dining area, the percentage could instead be 7.9% (calculated as (200/2000) x (9.5 months/12 months) = 7.9%).

As noted earlier, it is unclear whether a deduction for expenses will be allowed in respect of a period during which the employer’s office was available for use by the employee but the employee chose to continue working all or part of the time at the home office (that is, whether use of the home office by the employee during that period can be considered “employment related” rather than “personal” when determining a reasonable allocation of expenses for the year).

Assuming that the eligibility rules for employees deducting home office expenses are administratively revised as discussed above, employees who have been working from home during the pandemic should:

  • calculate the percentage of time they were required to work from home for 2020
  • calculate the proportion of home expenses they can attribute to a home office
  • retain receipts for relevant utilities, office supplies and repair and maintenance expenses paid in 2020
  • claim allowable expenses in their 2020 personal income tax return (CRA form T777, Statement of Employment Expenses; Revenu Québec form TP-59-V, Employment Expenses of Salaried Employees and Employees Who Earn Commissions, or a detailed statement of expenses)

Employee allowances for home office expenses

Existing rules

As an alternative to requiring an employee to bear the cost of all home office expenses personally, the employer may provide an allowance to the employee to help cover these costs. This allowance would be considered a taxable benefit to the employee and, if reasonable in amount, would typically be deductible to the employer. Similarly, a reimbursement for actual expenses incurred (including for amounts not otherwise deductible by the employee, such as office equipment or furniture) would be treated as a taxable benefit.

2020 treatment

An April 2020 CRA technical interpretation2 clarified that, “in the context of the COVID-19 crisis,” an employee working from home could receive a reimbursement from their employer of up to $500 for the purchase of computer equipment, if supporting receipts are provided, without it being considered a taxable benefit to the employee. During the CRA Roundtable portion of the Canadian Tax Foundation national conference on October 27, 2020, a CRA official noted that the CRA intends to extend this $500 tax-free allowance to purchases of other home office equipment (e.g. furniture) related to the COVID-19 pandemic.

PwC observes

It is critical that employers and employees distinguish between a receipted reimbursement and an allowance, to ensure that an amount paid to cover home office-related expenses is not taxable to the employee. If this $500 amount is simply an allowance paid to the employee without proof of purchase, it would continue to be considered a taxable benefit to the employee. Any portion of a COVID-19-related home office reimbursement that exceeds $500 will be considered a taxable benefit.

Employers must include the value of any taxable benefits provided to an employee in the employee’s taxable income (box 14) on form T4 Statement of Remuneration Paid for the calendar year, in addition to including the amount in the “Other information” area at the bottom of the T4 slip.

Employers should be aware that form T4 has additional reporting requirements for 2020, relating to the tracking of income for purposes of determining eligibility for the Canada Emergency Response Benefit, Canada Emergency Wage Subsidy and Canada Emergency Student Benefit. Specifically, the amount of employment income and retroactive payments during the periods March 15 to May 9, May 10 to July 4, July 5 to August 29 and August 30 to September 26 must be separately reported on the 2020 form T4.

The takeaway

As the calendar year end approaches, there is still uncertainty for employers and employees surrounding the deductibility of home office expenses for employees required to work from home during the COVID-19 pandemic. PwC continues to participate in discussions with the CRA to provide recommendations and suggestions on revising form T2200. We will keep you informed of any related tax authority announcements, but in the meantime, both employers and employees should consider and prepare for the related compliance requirements.

PwC can help you:

  • further understand the eligibility for employees’ deduction of home office expenses
  • prepare forms T2200 and TP-64.3-V for your employees, or assist your human resources and tax teams or departments to manage preparing and distributing these forms
  • prepare form T4 for your employees, or advise on the new reporting requirements for this form

 

1. CRA Guide T4044(E) Rev. 19: Employment Expenses; IT352R2 Employee’s Expenses, Including Work Space in Home Expenses (Archived)
2. 2020-0845431C6: Avantage imposable – télétravail / Taxable benefit

 

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