What are the tax implications of working from home?

Did you work from home in 2023, or have you been working from home this year?

While many companies in Canada have begun reverting back to in-office work policies, a fair number of people still work from home as employees, freelancers, or small business owners.

Working from home certainly has some perks and benefits, like the ability to work in your pajamas or do your housework while you’re taking business calls. However, it can change the way you file your tax returns. Here’s a quick guide on what to be prepared for.

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Different types of work-from-home scenarios and taxes

As of Nov. 2023, roughly 20 per cent of Canadians were still working from home, down from 30 per cent in Jan. 2022 and 40 per cent in April 2020, during the height of the pandemic.

The work-from-home business model was great for some companies, as it allowed them to downsize office space and create a more efficient operating model. Other companies found that they operated more efficiently by requiring employees to work in a central office, if not full-time then at least part-time with a hybrid business model.

Work-from-home employees

Those who work from home as employees have fewer tax implications compared to independent contractors or small business owners who work from home. Employees who work from home may be able to deduct a portion of their home office expenses, such as:

• Electricity
• Internet and data
• Printer ink and toner cartridges
• Paper, pens, and other office supplies

The CRA differentiates between salaried employees and those who are paid on commission. Since commissioned employees often have less income stability, the CRA grants them some additional deductions, such as property taxes, home insurance, and the lease of consumer electronics.

You can see a full list of the CRA’s allowable deductions for home employees.

Freelancers and small business owners

Freelancers or independent contractors are not employed by a single company. While they may choose to work for one client or business, they are taxed differently compared to a standard wage-earning employee. The same goes for small business owners who operate from home.

When self-employed contractors are paid, their taxes aren’t automatically taken out of their cheques as employee taxes usually are. Instead, freelancers are required to pay their taxes periodically throughout the year (quarterly) or annually.

This requires a bit more organization and discipline, and many self-employed independent contractors and business owners work with a bookkeeper or accountant to help them stay on top of their taxes.

Self-employed independent contractors and small business owners must also register for GST/HST if their business operations generate more than $30,000 in revenue in a quarter, or over four consecutive quarters.

While self-employed individuals bear more financial responsibilities than employees, they’re also given a wider range of deductions that they can claim on their tax returns, such as:

• Property taxes
• Mortgage interest
• Capital cost allowance
• Utilities (internet, power, heat)
• Home office supplies and equipment (laptop, pens, paper, etc.)

You can see the full list of allowable business-use-of-home deductions by the CRA.

Common pitfalls to avoid

Here are some common pitfalls to avoid in order to make filing your taxes easier and keep you in line with the CRA’s tax laws and regulations.

Overclaiming expenses

The most common mistake that work-from-home employees, independent contractors, and small business owners make is overclaiming expenses and deductions. The CRA has clearly outlined regulations regarding how much you can deduct from your taxes.

For example, you can’t deduct your entire mortgage payment or your entire electricity bill if you only use your home office space for business.

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You’ll need to calculate the percentage (based on the square footage) of your housing costs that are used by your home office for work or business income and then use that information to claim deductions according to CRA regulations.

Document disorganization

One of the simplest ways to make filing your quarterly or end-of-the-year tax returns easier is to stay organized. Keep your receipts, paperwork, paid invoices, and any other documents that you may need.

I recommend keeping a small file cabinet and organizing it month by month. It’s also a great idea to keep digital copies of everything. Bookkeeping programs like Freshbooks or Quickbooks have features that allow you to easily store digital copies of invoices paid, receipts, and other important tax documents.

When to get help

Whether you’re an employee, independent contractor, or small business owner, keeping track of your home office expenses can become difficult. This is especially true if you're a small business owner who primarily operates from home.

The best thing you can do is to stay organized and keep records of all of your receipts, expenses, and income.

If you find yourself struggling to file your own taxes at the end of the year, don’t be afraid to reach out to a tax professional and ask for help. The small amount you’ll pay them to help you stay on top of your taxes is often well worth the headache and potential penalties they can save you from.

Still want to take a shot at filing your taxes yourself? Keep on reading for an overview of some of the best self-filing tax software in Canada.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.

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