On the Tuesday after the August long weekend, at the ungodly hour of 1:19 AM, I received an e-mail with the ominous subject line: “New mail from the Canada Revenue Agency.” This is rarely good news.
Yes, the CRA was, as it seems to do each year, preparing to conduct a “review” of various line items from my 2020 personal tax return. As the six-page, single-spaced computer-generated form letter explained: “We regularly review returns after sending out the notice of assessment. These reviews are an important part of the self-assessment tax system. We would like to confirm that we assessed your return correctly and need more information about the claim(s) shown below.”
Specifically, the CRA wants more information about various, apparently suspicious, items on my return, including my claim for the new $75 digital news subscription tax credit, proof that I made a small political contribution and, most significantly, my claim for employment expenses, specifically, those relating to the workspace in my home.
I’ve been working from home as a result of the COVID-19 lockdown since March 13, 2020, which is when my Bay Street office was effectively shuttered. In the months since then, the lease term on my office expired and we were supposed to move to new premises last August, but such a move has been deferred until at least the fall. As a result, for the first time in my life, I claimed some home office expenses on my return, which was apparently sufficient to trigger a CRA review.
In the spirit of sharing, and in case you find yourself facing a similar review, let’s look at the home office expense rules and what the CRA has asked me to send them to justify my deduction. We’ll also take a glimpse into the future of the home office expense deduction, and what changes one tax lawyer would like to see, as expressed in a newly published paper on the subject.
The home office expense deduction
Under the Income Tax Act, an employee who is required to pay for employment expenses for which they are not reimbursed by their employer, including expenses for a home office, may be able to claim a deduction on their return for such expenses. For a valid claim, the employee must generally obtain from their employer a properly completed and signed Canada Revenue Agency Form T2200, Declaration of Conditions of Employment.
To be entitled to deduct home office expenses, an employee must be “required by the contract of employment” to maintain such an office, as certified by the employer on the T2200. For the 2020 tax year, the CRA said the requirement to work from home could be satisfied if there was a verbal or written agreement that the employee was working from home due to the pandemic. It must also be either where you “principally” (more than 50 per cent of the time) perform your duties of employment or the space must be exclusively used to meet customers on a regular and continuous basis in the course of employment.
The CRA review letter
In my review letter — under the heading: Line 22900 of the tax return, (Employment expenses) — the CRA asked me for a variety of information. First, it asked for a copy of my Form T2200, reminding me to make sure that it was signed by my employer.
The CRA then asked for a “detailed breakdown of the amount claimed and the supporting documents,” noting that “credit-card statements, bank statements and cheques by themselves do not give enough information to support a claim.” It asked me to be sure that the receipts and documents are “sorted, bundled, and labelled according to the expense claimed.”
The CRA also asked for a copy of Form T777, Statement of Employment Expenses, along with receipts and documents to support the expenses claimed for office supplies (postage, stationery, ink cartridge, etc.), other expenses such as employment use of a cellphone and work-space-in-the-home expenses.
For cellphone expenses, the CRA wants a copy of the mobile contract, copies of the detailed monthly account summaries or similar statements, proof of payment and “a breakdown of the minutes and data used to earn employment income.”
For my work-space-in-the-home expenses, the CRA is asking for a breakdown of how these expenses were calculated, the calculation I used to determine the percentage of these expenses I can deduct — indicating the number of square feet (or metres) — used for employment purposes, the number used for personal purposes, and “a copy of the floor plan of the residence with the home office.”
Future of home office expenses
In a new paper published this week in the Canadian Tax Journal, tax lawyer Bhuvana Rai of EY Law LLP, reviewed both the current and historical tax schemes for deducting employment expenses, particularly those associated with a home office. She concluded that the current legal test for these deductions is “inequitable, ineffective, and imprecise,” and, after thoroughly canvassing what other countries do in this area, proposed a variety of changes for the government to consider.
For example, to eliminate the administrative burden of having to track (and then submit) numerous receipts of valid employment expenses, Rai suggested that Canada could revert to the Royal (Carter) Commission on Taxation’s original recommendation to deal with the “practical administrative difficulties of itemized employment expenses for employees.” The commission’s original proposal was to allow employees to claim an optional deduction of three per cent of employment income, up to a maximum of $500 (which would be equivalent to about $4,000 in 2021 dollars), in lieu of an itemized employment expense deduction.
Another suggestion put forth in the paper is to eliminate the requirement for employees to obtain a signed T2200 from their employer, noting that “this requirement is an administrative burden that creates anxiety about liability for employers and offers them no real benefit. As a result, employers tend to be overly conservative in certifying that their employees qualify for the expense deduction.” Under the current system, Rai added, “employees with the least bargaining power are most likely to be affected by this requirement, and least able to advocate for themselves with an unwilling employer.”