How to Deduct Home Office Expenses for Real Estate Investors [REVISITED with CRA latest UPDATE]

I’ve shared on my blogs a few times about my involvement in helping out with a charity called the Hamilton Basket Brigade.

We raise money, purchase groceries and assemble them into baskets that we donate to local Hamilton families who are in need 3 times a year.

We started back in December 2014 with a small group of investors in Hamilton.

None of us was getting a donation receipt back then.

We did it again in Easter, Thanksgiving and Christmas 2015. We did it yet again in 2016.

Majority of our donors are real estate investors, giving back to the community.

Cumulatively, we’ve fed over 1000 families as of December 2016.

During 2016, we’ve achieved yet another milestone – we become an official charity, allowing us to issue donation receipts.

We want as many people in the entire world to see this and want to do this.

The HamiltonBasketBrigade.com is us paying it forward, donating money to buy groceries in bulk and personally deliver care packages of holiday dinners to families at risk of going hungry during the holidays Easter, Thanksgiving, and Christmas.

We had one of our events filmed to capture the heartwarming effects of such a simple gesture and need everyone’s help by donating, volunteering, and sharing this video. Go forth and #bethechange

Please share this video on your facebook, twitter and Instagram. Raise as much awareness to Hamilton Basket Brigade as possible.

We want all the support we can get. 😊

Thank you!

Now onto this week’s blog post –

A while ago I wrote a blog post about the eligibility to deduct home office expense for small business owners, real estate investors and realtors.

In the same blog post, I caution real estate investors who would like to deduct home office expense against their rental income.

Although the Income Tax Act allows you, as real estate owners, to deduct home office expense against property income, many are hesitant to deduct them against your income.

For one, if you own your rental properties in your personal names, the rental income schedule does not have a place for you to fill out the home office expense.

For two, even if you deduct home office expense, some CRA auditors do not see home office expense as an eligible deduction against property income.

For three, home office expenses cannot be used to create a loss. It can be used to reduce your rental or business income to nil but you cannot use the expenses to create a loss.

Any unused home office expense can be carried forward to future years for deductions.

For four, none of the Income Tax Act literature specifically calls out deducting home office expense against property income, making it very confusing to accountants to interpret the rules.

But….

Recently, Canada Revenue Agency released a new income tax folio (a new tax interpretation) on Business Use of Home expense February 1, 2017.

It provided detail explanations and examples on the criteria to qualify to claim home office expense as detailed in my previous blog post.

It also specifically called out the expenses incurred in earning income from property.

GREAT NEWS!

If you earn non-business rental income, you are eligible to claim home office expense.

In my first blog post, I have detailed the criteria that a taxpayer must meet to be eligible to claim home office expense.

Specifically, a taxpayer can only deduct the home office expense if

  • The work space is the principal place of business or
  • The work space is used exclusively to earn business income and used on a regular and continuous basis for meeting clients of the business

This Income Tax Folio specifically says that when taxpayers are earning non-business rental income, they do not need to meet these criteria.

That’s great news for real estate investors!

Furthermore, I mentioned previously that a taxpayer cannot use the home office expense to create a loss against his business income.

This will NOT apply to real estate investors earning non-business rental income.

Meaning – you can deduct home office expense even if you have a rental loss.

You can also deduct home office expense even if it means you have net rental loss afterwards.

Of course, similar to all other deductions, the expense must be reasonable. You are still required to keep a floor plan of your house, keep all your receipts for insurance, maintenance, mortgage interest, utilities, etc. to calculate the home office expense.

Now we have a CRA document calling out how to deduct home office expense against property income!

And now when we are questioned by CRA auditors why we are deducting home office expense against property income, we have this document to point too!

Until next time, happy Canadian Real Estate Investing!

Cherry Chan, CPA, CA

Your Real Estate Accountant

2 replies
  1. Tanvir Chowdhry
    Tanvir Chowdhry says:

    Thanks for sharing. You mentioned

    “you own your rental properties in your personal names, the rental income schedule does not have a place for you to fill out the home office expense”.

    If they changed it now which form would you claim it on now and can you claim it against 2016 rental income. ?

    Reply
    • Cherry
      Cherry says:

      Hi Tanvir, they never changed the rule. They just specifically calling out claiming home office expense against property income in their latest income tax folio view.

      They still doesn’t have a specific line for home office expense unfortunately. You can claim it as others.

      Reply

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