Home Office Expenses – New Deduction Methods

New Simplified Deduction Methods, New Taxable Benefit Exception, and Employer Obligations

On November 30, 2020, Deputy Prime Minister and Minister of Finance Chrystia Freeland released Supporting Canadians and Fighting COVID-19: Fall Economic Statement 2020 (the “Fall Economic Statement”). The Government’s news release in respect of the Fall Economic Statement 2020 is here. The text of the Fall Economic Statement 2020 is here.

The Fall Economic Statement contained a commitment to allow employees working from home in 2020 due to COVID-19 to deduct up to $400 in-home office expenses without the need to obtain a Form T2200 from their employers certifying certain conditions in section 8 of the Income Tax Act (Canada) (“ITA”) had been met.

On December 15, 2020, the Canada Revenue Agency (“CRA”) released the simplified home office expense deduction details. An explanation from the CRA of the changes can be found here. For 2020, the measures allow employees to choose one of two methods to deduct home office expenses: a simplified method (referred to by the CRA as the “new temporary flat rate method”) and a detailed method.

Both methods require an employee to have:

1. worked from home in 2020 due to the COVID-19 pandemic (or, in the case of the detailed method, been required by their employer to work from home);
2. worked more than 50% of the time from home for at least four consecutive weeks in 2020 (the “four weeks/50% test”); and
3. incurred unreimbursed expenses that are used directly in their employment during that period.

Under the new temporary flat rate method, employees may deduct from employment income $2 for each day they worked from home in 2020 due to the COVID-19 pandemic, up to a maximum of $400. The employee does not need to obtain a Form T2200 or a Form T2200S from their employer to use the new temporary flat rate method and does not have to preserve or file receipts with their tax return for 2020. The new temporary flat rate method may not be used if the employee claimed any other employment expenses in 2020.

The detailed method, which is not capped at $400, simplifies the normal requirements of subparagraphs 8(1)(i)(ii) and 8(1)(i)(iii) and subsections 8(10) and 8(13) of the ITA. Under the detailed method, for 2020 only, an employee can claim the cost of supplies consumed in employment duties plus certain expenses directly on their workspace by obtaining a new Form T2200S, which, compared to the normal Form T2200, significantly relaxes an employer’s compliance burden. Form T2200S requires employers to state:

1. whether the employee worked from home due to COVID-19;
2. whether the employer reimbursed the employee for home office expenses; and
3. whether the reimbursed amounts were included on a T4 slip. Employees are required to retain receipts for expenses claimed under the detailed method, and they will have to fill out their own T777S or T777 to provide details of the expenses.

The four weeks/50% test that must be met to use the detailed method relaxes the ordinary requirements to deduct home office expenses relating to a home workspace (e.g., utilities and heat) from employment income. The CRA says this change will ensure more employees can claim the deduction than would have otherwise been possible under its longstanding practices.

For employees using the detailed method, the CRA has provided detailed guidance concerning which home office expenses are deductible and how to apportion home-wide expenses such as heating, utilities appropriately, and rent to home offices depending on whether they are used only as a home workspace, used as a workspace and for personal purposes (e.g., a certain area around the kitchen table), or are shared with another resident of the home.

If the employee is claiming home office expenses in addition to other employment expenses (such as motor vehicle expenses, sales expenses of commission employees, travel expenses), the employee is required to obtain a regular Form T2200.

Given the potential magnitude of the employment expense deductions available to employees under the detailed method (for instance, a portion of the rent, utilities, certain internet fees, repairs, and supplies consumed directly in the course of employment duties), employers should be prepared to respond to a volume of employee requests to obtain a signed Form T2200S.

There is no statutory obligation for an employer to issue a Form T2200 or T2200S to its employees. However, the CRA has stated it would “expect” employers to complete the form in situations where an employee would have “reasonable grounds” to make the related claims. In deciding whether or not to issue such forms, employers should give due regard to any commitment in a contract of employment to assist its employees with tax minimization, making employment deductions, or to issue such forms and the impact any decision will have on employee relations.

The CRA will accept electronic signatures on both Form T2200S and Form T2200.

Also, on December 15, 2020, the CRA released additional administrative guidance, effective from March 15, 2020, to December 31, 2020, in respect of a $500 taxable benefit exception during the COVID-19 pandemic only, for employee computer or home office equipment reimbursed by the employer or purchased using an accountable allowance provided by the employer.

Normally, subject to limited exceptions, the CRA believes that any property procured by an employer on behalf of an employee (tangible or intangible) should be reported on a T4 as a taxable benefit to the employee. The CRA stated that it would not consider an employee to receive a taxable benefit in this new guidance. The employer either pays for or reimburses up to $500 of computer or home office equipment for an employee, provided the employee submits receipts to the employer.

If all or any portion of the $500 does not meet the requirements in the guidance, such portion should be reported on a T4, subject to the CRA’s normal policy concerning cell phone usage or internet services, which can be found here. The guidance on the $500 taxable benefit exception can be found here.

Source: McCarthy.ca