By Jennifer Clee

Section 18(12) of the Income Tax Act permits a self-employed individual to deduct expenses associated in using part of the home as a place of business. However, no claim may be made in respect of any “work space” in a “self-contained domestic establishment” (dwelling house, apartment or similar place in a residence in which you eat and sleep), unless one of the following tests is met:

• the work space is the principal place of business; or
• the work space is used exclusively for the purpose of earning income from business and is used on a regular and continuous basis for meeting clients, customers or patients of the business.

Regarding test (a), it’s not necessary to set aside part of the house exclusively for the business, nor must the work space be the only place of business. To satisfy the test, the work space must be the “principal” or main place of business. To satisfy test (b), you must define exclusive work space used to earn income from business, and it must be used on regular and continuous basis for meeting clients or customers.

Where either test is satisfied, the permitted deduction consists of the total permitted expenses (expenses related to the work space; e.g., rent, insurance, property taxes, mortgage interest, heat and light), prorated for the square footage of the work space vis a vis the total square footage of the house, and for the time allocated for business (as opposed to personal) use of the work space.

Thus, if a REALTOR® utilized a 400 square foot den in his home as a work space in a home of 5,000 square feet, and the den was used 40 per cent of the time for business use, the permitted deduction would be 40 per cent of 12.5 per cent of the permitted expenses. Also, the amount of the deduction cannot exceed the amount of income from the business, before claiming deductions for work space in the home.

Some REALTORS® have expressed concern about Deep v. The Queen, a 2006 decision of the Tax Court of Canada in which the taxpayer, Dr. Deep, appealed a reassessment by the Canada Revenue Agency (CRA). The majority of the issues before this particular court are of no concern here (except as a source of humour) and the appeal was, for the most part, unsuccessful. Surprisingly, despite facts suggesting that neither of the two tests set out above were met, the court upheld and slightly increased the amount of permitted deductions for home office expenses claimed. However, the allowed expenses were substantially less than those claimed by Dr. Deep and the deductions, after adjusting for the size and use of the work space, were nominal.

The decision of the court—and, for that matter the auditor—allowing any deduction for work expenses is clearly inconsistent with CRA’s stated policy and is an anomaly in the law. One possible explanation for the decision could be insignificance of the work space or home office expense issue in relation to the other issues with which the court was concerned.

REALTORS® should not be misled by Deep. To take advantage of the home office deductions, self-employed licensees should ensure that either test (a) or (b) is satisfied and that expenses claimed have been prorated for use and size of the work space. Licensees would be also be well served by consulting professional accountants.

Income Tax Act, R.S.C. 1985, c.1, s.18(12).

Deep v. The Queen, 2006 DTC 3033.

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