A self-employed tradesperson can deduct a share of home costs if the home is the principal place of the business, or a part of it is used regularly and exclusively to meet clients. The deduction is the eligible housing costs, a share of rent or mortgage interest, utilities, property taxes, insurance and maintenance, multiplied by the percentage of the home used for the business. You claim it on the business-use-of-home section of Form T2125. It is real money for a contractor who runs quotes, books, ordering and the van paperwork from a dedicated space at home, but it comes with two rules that catch people out: the loss restriction and the exclusive-use test.
Who qualifies
You can claim business-use-of-home costs if either of these is true:
- Your home is your principal place of business, meaning you have no other fixed base and you run the business mainly from there, or
- You use a part of your home exclusively and on a regular basis to meet clients or customers in the course of the business.
For most sole-trader contractors the first test is the one that fits. You may spend your day on job sites, but if the business has no shop or yard and you administer it from home, the home is your principal place of business. The room or area you count must genuinely be used for the work; a corner of the kitchen table used only at tax time will not stand up.
What counts as an eligible cost
You take a list of running costs for the whole home and claim the business-use share of each:
- Rent, if you rent, or mortgage interest if you own (the principal portion of a mortgage payment is never deductible, only the interest)
- Utilities: heat, electricity and water
- Home insurance
- Property taxes
- Maintenance and minor repairs (cleaning, light bulbs, furnace servicing)
If you own your home, claiming capital cost allowance on the house itself is possible but usually a poor idea, because it can jeopardise the principal residence exemption when you sell. Most accountants leave the house out of CCA for that reason.
How to work out the percentage
The business-use percentage is normally based on area. Take the square footage (or number of rooms, if they are roughly equal) used for the business and divide by the total finished area of the home. If a space is used part for business and part personally, prorate again for the time it is used for work. So a 150 square foot office in a 1,500 square foot home used only for the business is 10 percent; if that same room doubles as a guest room half the time, you scale the 10 percent down accordingly.
Worked example
A self-employed electrician owns a 1,600 square foot home and uses a 160 square foot room exclusively as the business office. The business-use percentage is 10 percent. Over the year the home costs are: mortgage interest $9,000, utilities $3,000, insurance $1,400, property taxes $4,000 and maintenance $600, a total of $18,000. Ten percent is $1,800, which is the home-office deduction for the year, entered in the business-use-of-home section of the T2125.
The loss restriction (the rule people miss)
Business-use-of-home expenses cannot create or increase a business loss. They can reduce your net business income to zero, but not below it. If your trade had a thin year and the home-office claim would push you into a loss, the deduction is limited to the amount that brings income to nil, and the unused portion is carried forward to a future year when there is income to absorb it. Nothing is wasted, but it is deferred.
Records to keep
Keep the bills: utility statements, the property tax notice, the insurance policy, mortgage interest statements, rent receipts and maintenance invoices, plus a simple note of how you measured the business area. The CRA keeps a close eye on home-office claims that look large for the type of business, so be able to show the measurement and the bills. As with all business records, keep them for six years.
Common mistakes
- Counting the whole mortgage payment. Only the interest is eligible, never the capital repayment portion.
- Claiming a space that is not really exclusive. A room used for the business and as the family den does not get a full claim; prorate it honestly.
- Creating a loss with the deduction. The home-office claim cannot take business income below zero. The excess carries forward instead.
- Putting the house into CCA without thinking. Claiming depreciation on your home can cost you the principal residence exemption on sale. Usually not worth it.
- No measurements, no bills. A percentage with nothing behind it is the first thing a reviewer asks for.
Common questions
Can I claim a home office as a tradesperson?
If you run your business from home and use a space regularly for work, or meet clients there, you can claim the business-use share of home costs (heat, hydro, a portion of rent or mortgage interest, property tax and maintenance). The self-employed claim it on form T2125.
How do I work out the share?
Take the area of your work space as a percentage of your home's total area and apply that to the eligible running costs. If the space is also used personally, prorate by time as well, and keep your bills and your calculation.
Is there a catch?
Yes. The home-office deduction cannot create or increase a business loss; if your claim is more than your net income, you carry the unused part forward. You also do not normally claim capital cost allowance on your home, to protect the principal-residence exemption.
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