The home office deduction, worked out for self-employed Canadians.

Plenty of Edmonton businesses run out of a spare bedroom, a basement corner or a converted garage. If that's you, the home office deduction lets self-employed people in Canada claim part of their housing costs as a business expense. It's one of the most valuable deductions available to sole proprietors, and one of the most often skipped because people aren't sure they qualify.

Here's how CRA decides, how to calculate your share, and two worked examples: a condo near 124 Street and a house in Sherwood Park.

1The two tests for a home office

CRA calls it "business-use-of-home expenses." To claim them, your workspace has to meet one of these two conditions:

• Test 1: It's your principal place of business. Most of your work happens there. A bookkeeper, designer or online seller who works from home most days usually meets this.
• Test 2: It's used only for business, and regularly for meeting clients. A massage therapist with a dedicated treatment room at home, or a tutor with a separate lesson room, often fits here even if they also work elsewhere.

A contractor who spends their days on job sites but does quotes and invoices in a home office can still qualify under test 1 if the home office is where the business is actually run. It depends on the facts, so it's worth talking it through with your accountant if you're borderline.

2What home costs you can include

Internet and phone aren't really "home" costs. Claim their business-use share separately as regular business expenses.

3Working out your home office deduction share

The standard method is area-based: square footage of your workspace ÷ total finished square footage of your home. Finished area generally includes developed basements but not unfinished storage or garages.

If the space is used only for business, that percentage is your claim. If it's a shared space, like a dining table that's an office from 9 to 5, you also reduce for time: the hours used for business divided by the total hours in the period. A shared space claim is smaller and harder to defend, so a dedicated room is better if you can manage it.

4Two Edmonton-area examples

A one-bedroom-plus-den condo near 124 Street

Say you're a freelance designer renting an 800 square foot condo, and the 100 square foot den is your office and nothing else. That's 12.5% of the home.

As a renter, you don't claim property tax or mortgage interest, because you don't pay them directly. If your rent includes heat and water, you simply don't list them separately.

A house in Sherwood Park

Now say you're a registered massage therapist who owns a 2,000 square foot house (including a finished basement). A 200 square foot basement room is set up as a treatment room, used only for clients. That's 10%.

Notice the mortgage line uses interest only. Your lender's annual statement shows the split between interest and principal. These numbers are illustrations, not typical costs, so plug in your own.

5Records to save for your claim

CRA can ask you to support a home office claim, and the easiest way to answer is to have the paperwork in one place. For each year, save:

• Your home's total finished square footage and your workspace measurements, with a quick sketch or photo of the space.
• Your lease, or your mortgage lender's annual statement showing interest paid.
• Utility bills for heat, electricity and water.
• Your home or tenant insurance policy and premium.
• Your property tax notice from the City of Edmonton, Strathcona County or wherever you live.
• Receipts for maintenance and repairs, noting which ones relate only to the office.

If your bookkeeping software tracks these through the year, the calculation at tax time takes minutes. If they're scattered across email and paper, it can take an afternoon.

When your setup changes mid-year

Moved in July? Turned the den into a nursery in the fall? Pro-rate the claim by the months each setup applied. Say you used a 10% office from January to June and nothing after that: claim 10% of the eligible costs for those six months only.

What about GST on home costs?

If you're registered for GST, you may be able to claim input tax credits on the business share of home costs that carry GST, such as electricity, gas and some repairs. Rent on a home and most home insurance don't include GST, so there's nothing to claim on those. Because the GST rules for home offices have their own quirks, this is a good one to confirm with your accountant before you file.

Whatever you claim, make sure you're not counting the same dollar twice. GST you claim back as an input tax credit shouldn't also be included in your income tax expense.

6Common home office mistakes

• Claiming the whole basement when only one room is the office.
• Using total square footage including the garage, which shrinks your percentage, or excluding the finished basement, which inflates it.
• Deducting mortgage principal. Only interest counts.
• Claiming CCA on the house without understanding the effect on your principal residence exemption.
• Creating a loss. The deduction stops at zero business income; the rest carries forward.
• No records. Save your measurements, a simple floor sketch, and the year's bills and statements.

The home office is just one line on a long list. Our self-employed tax deductions guide covers the rest. We set up home-based businesses in Edmonton, St. Albert and Spruce Grove so these numbers are tracked all year, not hunted down in April. If that sounds useful, book a call with Joey or Steph.

7Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.