If you work from home, either as an employee or independent contractor, you may be able to write off a portion of your home office expenses come tax time. This has been of particular interest in the past few years for the millions of employees (myself included) who worked exclusively from home during the pandemic.
For the 2020, 2021 and 2022 tax years, the government even introduced a simplified flat rate method for employees to calculate their work-from-home expenses, rather than having to keep detailed records of all their specific expenses and then apportion them by square footage. (No word yet on whether this method will be allowed in 2023).
A recent Quebec court case dealt with an independent contractor’s ability to write off his home office expenses in 2014. But before getting into the specifics of this case, let’s review the basic rule for deducting such expenses if you’re self-employed.
If you’re an independent contractor (in other words, not an employee), you can deduct home office expenses from your business income provided your home office is your principal place of business. If it’s not, then it must be used “exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.”
The recent Quebec tax case involved an electrical engineer who used a portion of his home in operating his business. Between 2011 and 2014, the taxpayer offered his services to a large Quebec-based engineering company that provides advisory services in mechanical engineering, electricity, sustainable development, structural and civil engineering.
The company was the subject of an audit by Revenu Québec, which discovered invoices for professional fees issued by the taxpayer and presumably paid by the company, but which the taxpayer failed to declare in his income. As a result, he was reassessed, and various amounts were added to his taxable income for the years in question. A portion of the taxpayer’s business expenses were also disallowed.
The taxpayer appealed the reassessments of the 2011 and 2013 tax years, and settled out of court for those two years. In a 2019 signed settlement, Revenu Québec and the taxpayer agreed that the expenses for the business use of his home were to be apportioned using a 22-per-cent allocation.
For the 2014 tax year, however, Revenu Québec was only prepared to allow 17.05 per cent of his home office expenses, while the taxpayer argued it should be 28 per cent. The matter ended up in the Court of Québec, where the dispute about the portion of deductible home office expenses hinged on how to properly measure the square footage of his home, and which portions of his home were used for business purposes.
Revenu Québec’s approach was to simply take the total exterior surface of his residence, which measured 44 feet by 28 feet, or 1,232 square feet (sf), with a basement of the same size, for a total of 2,464 sf. The taxpayer used three rooms in his home exclusively for professional use. Those three rooms represented an area of 420 sf. Revenu Québec’s position, therefore, was that 17.05 per cent (420/2,464) of the taxpayer’s home was used for work, so 17.05 per cent of the home’s expenses could properly be deducted for tax purposes.
The taxpayer disagreed, arguing that the thickness of the walls of the basement (16 inches) and the ground floor (13.5 inches) should be subtracted from the calculations since they are not “usable areas.” He similarly argued that all the interior walls should be excluded since they are also unusable, and that the corridors, stairwell and other common areas for circulation and access to the rooms should be taken into account since these spaces are used for both personal and business purposes.
Taking this all into account, the taxpayer recalculated the business use of his home by taking the 420 sf of the three business-use only rooms, but dividing it by 1,505 sf, which represented the total “net usable area” after accounting for the thickness of the walls and the shared spaces. This produced a business-use percentage allocation of 28 per cent (420/1,505).
The judge reviewed the evidence and turned to the Quebec Taxation Act, which states that an amount can only be deductible for Quebec income tax purposes to the extent that the expense is “reasonable.” The judge concluded it “does not seem reasonable to maintain that the walls that delimit a residential work space are useless for the exercise of the professional activity that takes place there. Whether for climatic reasons, privacy or pure convenience, these walls are an integral part of this space.”
Furthermore, the judge said a person’s home is “first and foremost their habitat” and the “place of their private life.” A taxpayer can certainly choose to work from home and reserve a certain amount of space exclusively for this purpose, but “the corridors, the stairwell or the other indoor movement areas are essential to the personal use of the premises.” Thus, Revenu Québec was “reasonably justified” in considering that these common areas were not used “exclusively to earn income from a business,” and so they cannot be considered as part of the eligible square footage.
The judge ruled, however, that the taxpayer could use the same 22-per-cent allocation rate for his home office expenses that he had previously negotiated with Revenu Québec in the settlement agreement for the 2011 and 2013 tax years.