Employee home office expenses for 2021: Government extends temporary rules

Note: This blog is an updated version of our February 11, 2021 blog on the home office expense rules and focuses on the 2021 taxation year. For a summary of the rules that were applicable for the 2020 taxation year, see our February 11, 2021 blog.

In response to the millions of Canadians that continue to work from home due to the pandemic, the federal government announced as part of the government’s 2021 Fall Economic Statement that the temporary home office expense rules introduced in 2020 will be extended to the 2021 and 2022 tax years and the maximum claim under the flat rate method will be increased to $500. As a result, forms T777S “Statement of Employment Expenses for Working at Home Due to Covid-19” and T2200S “Declaration of Conditions of Employment for Working at Home Due to COVID-19” will continue to be used.

As part of this blog, we will discuss the following topics:

• overview of the tax rules for home office expenses
• updated temporary home office expense claims process
• T2200 considerations for employers

Overview of tax rules for home office expenses

Under normal circumstances, employees who want to deduct their home office expenses must meet two main conditions.

First, an employee must be required by their contract of employment to maintain a workspace in their home and pay for the related expenses. Employers attest to this requirement on T2200 forms issued to their employees, and employees are only eligible to claim a deduction if they have this form in hand.

Second, the use of the workspace must meet one of two conditions:

• the workspace is where the employee “principally” (more than 50 per cent of the time) performs the duties of their office or employment
• the employee uses the workspace exclusively for earning employment income and for regularly and continuously meeting customers or clients while doing their work

These rules have not changed. The changes introduced by the Canada Revenue Agency (CRA) for the 2020 tax year and the extension of these changes to 2021 are administrative concessions to these rules. Employees who worked at home before the pandemic should follow the detailed method for claiming a deduction for 2021.

Updated temporary home office expense claim process

For employees who worked from home during 2021 due to the pandemic, the CRA has simplified the process by:

• relaxing the employment contract requirement and providing a simplified definition of what working principally from home means in a pandemic
• allowing employees to claim a temporary flat rate deduction for 2021 if conditions are met, instead of using the detailed calculation
• providing extensive online tools, forms and guidance to help employees claim the deduction

The eligibility criteria and calculations for the detailed and flat rate methods are slightly different, as we discuss in the next two sections.

Temporary flat rate method: Eligibility criteria and calculations

Under the temporary flat rate method, employees qualify for a 2021 deduction if they meet all of the following conditions:

• worked from home in 2021 due to the pandemic
• worked from home more than 50 per cent of the time for at least four consecutive weeks in that year
• claim home office expenses only and no other employment expenses
• were not fully reimbursed by their employer for all of their home office expenses

The temporary flat rate method allows eligible employees to claim a deduction of $2 for each day they worked at home in 2021 due to COVID-19, up to $500. The amount is a substitute for actual home office expenses paid by the employee, such as rent, electricity, home internet access fees, office supplies (e.g., pens, paper) and unreimbursed cell phone costs.

Other points to keep in mind:

• if an employee was not required to work from home, but their employer provided them with the choice to work at home because of the COVID-19 pandemic, then the CRA will consider the employee to have worked from home due to COVID-19
• employees who want to claim other employment expenses, such as employment-related auto expenses, must use the detailed method
• an employee who was reimbursed for some but not all of their expenses can use the flat rate method as long as they meet the other conditions
• the number of days worked at home due to the pandemic includes both full-time and part-time days but not days off (whether for vacation, illness or another reason)

Although the deduction is limited, the temporary flat rate method has some advantages:

• employees choosing the temporary method do not need to have their employers complete and sign a Form T2200 or T2200S, although they should do their best to document how many days they worked at home
• they do not need to determine and summarize eligible costs, or keep receipts
• if they worked at home occasionally during parts of the year but not primarily at home, those days will count if the individual otherwise qualifies

Employees must use the Form T777S, “Statement of Employment Expenses for Working at Home Due to COVID-19” to report that they are using the flat rate method and calculate their deduction.

Detailed method: Eligibility criteria and calculations

Under the detailed method, employees can claim the employment portion of actual home office expenses paid. Although these temporary rules are simplified, the calculations are essentially the same as for employees who are required to work at home more generally.

Under the detailed method, employees qualify for the deduction if they meet all of the following conditions:

• worked from home in 2021 due to the pandemic or were required to work at home by their employer
• were required to pay for expenses related to their home workspace and used the expenses directly in their work
• either:
  • worked in their home workspace “mainly” (more than 50 per cent of the time) for at least four consecutive weeks, or
  • only used their workspace to earn employment income, in particular, for regularly and continually meeting clients, customers or other people while doing their work
• have received a signed T2200 or T2200S form from their employer

The CRA has confirmed the employer’s requirement for an employee to work from home may be a written or verbal agreement. It does not have to be part of the employment contract. As was the case for the flat rate method, employees who chose to work at home due to the pandemic will be eligible.

Qualifying employees using the detailed method must first determine the total of their eligible expenses overall. They must then prorate these expenses (excluding office supplies) based on the portion of their home used for employment, as we discuss in the next section.

Determining the percentage of workspace at home

To claim the employment portion of actual amounts paid, employees need to determine the portion of their home used for work based on both size and use (employment versus personal). For common areas, such as a kitchen table, the proration needs to account for both the floor space used for employment and the time spent.

If a specific space is used only for employment, employees will only need to prorate based on the amount of that space. The CRA provides plenty of examples and guidance for determining the percentage of the employee’s home used as a workspace, including situations such as common versus designated workspaces, more than one employee working in the same home, and changes of workspace during the year.

Eligible expenses

Eligible expenses include home office expenses as well as office supplies. Employees must separate the expenses between their employment use and non-employment (personal) use.

Eligible home office expenses include electricity, heat, water, utilities, home internet access fees, maintenance and minor repairs, and rent. (Commissioned employees can also claim some other expenses).

Non-eligible home office expenses include mortgage interest, principal mortgage payments, home internet connection fees, furniture (e.g., office chairs and desks) and capital expenses (e.g., replacing windows, flooring and furnace). To determine the amount that is deductible, eligible home office expenses are prorated by percentage of the home used as a workspace (discussed above).

Where an employer requires the employee to pay for office supplies or certain phone expenses, the employee may be able to claim those expenses. The CRA’s website includes a comprehensive list of eligible and ineligible supplies. Eligible supplies do not need to be prorated like other home office expenses.

In general, to be eligible, the cost of supplies must relate to things that are consumed when doing work, such as paper or ink. The costs of more permanent items like calculators and computer cables are not deductible as office supplies, even though they are relatively inexpensive. The CRA is quite strict in applying these rules.

Calculating eligible home office expenses

Once the proration factor for costs (other than supplies) and total costs has been determined, the employee can then determine the portion of each type of cost that is eligible for deduction. When doing the calculation, only expenses incurred during the work-from-home period(s) qualify.

For employees using the detailed method, the CRA provides guidance to help determine eligibility, employment use of workspace and eligible expenses. The CRA also offers an online calculator that guides users through the process of computing the home office expense deduction under the detailed method, including prorated amounts.

One common question is how to calculate the amount of internet access fees that relate to employment. The CRA’s calculator prorates these costs like other costs such as electricity or heat (i.e. based on the home work space percentage). The CRA has confirmed with us that they would allow employees to use another reasonable method for this calculation, but they must ensure they meet all the following conditions:

• the cost of the internet plan is reasonable
• the cost of the internet plan has been divided between employment and personal use on a reasonable basis
• the employee is able to substantiate the amount of data used directly in the performance of their employment duties

The employee should include the employment-use portion of the fees calculated under “other expenses” on line 9270 of the T777 or T777S forms. In addition, if using the online calculator, the home internet fees should not be included in the box “Total electricity, heat, water and home internet access fees you paid from” as this total number will be prorated by the workspace at home allocation.

Another thorny issue relates to condominium fees. The CRA has stated that employees can claim the portion of these fees that relate to electricity, heat and water consumed in a condo unit owned by the employee using a reasonable basis. Calculating the utility portion of maintenance fees will be difficult for most taxpayers as they will need to obtain and extract information from the condo corporation’s financial statements. To assist with this, the CRA has indicated to us that they will accept that the administrator of the condominium building provides the information from either the current or previous fiscal year, whichever is available at the time of the request.

Employees who use the detailed method must maintain documentation to support their home office expense claim and have a signed copy of either Form T2200S or T2200 at the time they make their claim.

Employees claiming both home office and other employment expenses (such as automobile deductions) should use Form T777 Statement of Employment Expenses. Employees claiming home office expenses only should use the simplified Form T777S.

Which method produces the best result?

Like many things in tax, the best approach should be determined case by case, based in part on the answers to these questions.

• Do you rent your home? Under the detailed method, renters generally have higher eligible expenses than homeowners. Mortgage interest is generally not deductible, and costs such as insurance and property taxes are only eligible for commissioned employees. However, such expenses are indirectly reflected in rental payments, so the total expense that renters use as a starting point is usually much higher.
• Do you own your home? Although $2 per day doesn’t sound like much, if your actual eligible costs are mainly limited to utilities and internet, then your actual prorated cost may be in this ballpark.
• What is a reasonable internet amount? As discussed, the CRA’s calculator prorates internet costs based on floor space usage in the same way as other costs. If an alternative but reasonable approach is used, this could result in a somewhat higher deductible amount than the fixed rate approach.
• Do you qualify under one method but not the other? Some employees may be eligible for one method but not the other. For example, an employee who also wants to claim automobile expenses must use the detailed method.
• Did you return to the office during 2021?  In one example, the CRA addresses a situation where an individual (“Kumi") worked at home full-time for two consecutive months (April and May) and then worked part-time for the balance of the year. During the part-time period, the individual was working primarily in the office. Under the detailed method, only expenses for April and May will be allowed while the workdays at home after May will count under the flat rate method.
• Which method is simpler and costs less? If you qualify, the fixed rate method is simpler to use and no T2200 is needed. If you use a practitioner to prepare your tax return, the fees may be lower depending on how you are charged and the work involved to make a detailed claim.

The CRA has provided extensive guidance, including a FAQ page, and online tools to help employees navigate these rules and determine which method to use. In addition, CRA’s T4044 Employment Expenses guide has been updated to reflect the 2021 home office expense rules and is a helpful resource.

T2200 CONSIDERATIONS FOR EMPLOYERS

The CRA will continue to require employees who want to claim home office expense using the detailed method to obtain either the T2200 or T2200S.  We thought it would be helpful to recap some of the most common concerns we heard last year from employers as they are still applicable in 2021:

Which form?

As discussed, a T2200 or T2200S is only needed for employees who want to use the detailed method. If the employee worked from home only because of the pandemic, the T2200S can be provided to them. For employees who have additional expenses, such as working from home generally (i.e. before the pandemic hit), travel expenses or other costs, then the regular T2200 is required. The CRA updated the T2200 on January 18, 2022, but unfortunately, it did not include the new home office wording from the T2200S on the T2200. On the revised T2200, the home office question is “Did this employee's contract of employment [under the contract itself or in a separate written or verbal agreement] require them to use a portion of their home for work?” We asked the CRA for guidance where an employee worked at home due to the pandemic only but also had other deductible employment expenses. In such a situation, we believe the best approach is to complete the T2200 for non-home office expenses only (i.e. don’t answer question 10 and the related information) and provide the employee with a T2200S in the same manner as other employees to cover off home office expenses. We are awaiting comments from the CRA on this issue, but we believe our suggested approach is reasonable.

Employers’ responsibilities

As discussed, employees who want to use the detailed method must have a T2200 or a T2200S. Employers will need to decide whether to go ahead and provide the form (generally, T2200S) to any employee who could be eligible to use the detailed approach, or whether they will only provide the form to employees who ask for it.

The CRA indicates that employers may generate Form T2200S electronically as long as the certain conditions are met. The CRA has created a fillable PDF form as well as a corresponding xml file to assist employers. In addition, the CRA confirms that an electronic signature can be used.

Authorized person

According to the CRA, determining who is an authorized person for purposes of certifying the T2200 and T2200S forms is up to the employer’s discretion. The CRA does not require the form to be signed by an authorized “officer”. The authorized person’s contact information is required to be included in case the CRA would like to follow up, and employers should consider this when determining who should certify the form.

Interaction with CRA’s $500 reimbursement policy for home office equipment

Many employers are paying reimbursements and have taken advantage of the CRA’s temporary reimbursement policy on home office equipment in 2020 and 2021. For many employers, some of the costs will be for supplies (which would not create a benefit if consumed for work) and others will be for equipment such as desks, monitors, chairs, etc., which are not deductible as employment expenses.

The CRA has confirmed that if the employee is reimbursed for the purchase of office or computer equipment, all of which are expenses that are NOT eligible to be claimed by the employee as employment expenses, the employer should indicate “No” for question 2 “Did you or will you reimburse this employee for any of their home office expenses?” on the Declaration of Conditions of Employment for Working at Home Due to COVID-19 (Form T2200S).

Employees who were already required to work from home

The new measures do not affect employees who worked from home before the pandemic and claimed the related expenses. Employers should follow their existing T2200 process for these employees.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.