When you incorporate your business a legal entity that’s separate and distinct from you is created. This is an important point to remember because, if you’re the sole shareholder, it can be easy to forget this distinction and become lenient when it comes to respecting the boundary between you and the corporation. The relationship and transactions need to be formal and documented. Let’s examine the treatment of home office expenses when your business is incorporated.
Home office expenses can be deducted if a formal rental agreement exists between you and the corporation. This rental agreement should include details such as rent amount and size of space. The corporation deducts this rent as an expense and you include the rental income on your personal tax return using form T776, Statement of Real Estate Rentals. The rental income that’s reported on your personal tax return is reduced by the costs of having/maintaining the space (ie., insurance, property tax, utilities, etc.).
Employee with T2200
If you are an employee of your corporation (paid a salary and issued a T4), the corporation can provide you with a T2200, Declaration of Conditions of Employment form indicating that you are required to use a portion of your home for work. This form enables you to deduct, on your personal tax return, certain costs associated with a home office such as: heat, hydro, water, and maintenance. Note: it doesn’t include insurance, property taxes or mortgage interest. This approach does not provide a deduction for the corporation and only applies if you are an employee. In other words, if you only receive dividends from the corporation, you are not considered an employee.
This is a general overview of the options that exist for deducting home office expenses; there are also home office eligibility criteria to consider. It’s always important to ensure dealings with your incorporated business are formal and documented.