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Deducting Home business expenses

Expert: Michael Fromstein

Kostas asked:

I own a small business in Ontario that employs two people full-time, one of which is my wife, and one part-time employee. It is a retail/service business.

My wife is giving birth in a week but she does not qualify for maternity benefits due to her relation to me. The business brakes even each month without any profit and we cannot afford to hire a replacement for her.

She will have to stay home with the baby for a couple of months and then we are going to have to get creative. My idea is to stay home with the baby. In order to do so I have to do something that will contribute to the household income.

If I open a new business as a self propriotorship and run it out my home, could I deduct part of my mortgage, and utilities?

Michael Fromstein answered:

CRA's view is that to qualify, the work space must be

a) the principal place of the business of the individual, or
b) used exclusively (i.e. set aside and not used for other purposes) to earn business income and on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business. You can base the deductible portion of home expenses either by dividing the number of rooms used for business by the total number of rooms or the business square feet divided by the total square feet.

The expenses related to the work space could include, for example, the prorated portion of rent, property insurance, property taxes, mortgage interest or operating costs such as heating and lighting. Claiming those expenses will have NO impact on your ability to claim the principal residence exemption to exclude any future capital gain from being subject to tax.

You may claim tax depreciation (capital cost allowance) on business assets (computer, desk, etc) with no adverse tax consequences, but if you claim tax depreciation on the portion of the house you use for business, you will not be entitled to the principal residence exemption on that portion of your home when you sell.

You cannot claim any of the above expenses to the extent that the expenses exceed income from that business operated from home. Any expenses must be carried forward to be deducted against future income from that business. However, telephone, consumed supplies and other similar expenses may relate to the business, they do not relate to the work space and therefore you can claim them even if that creates a loss.

About the author

Michael Fromstein is a tax specialist with Integrated Professional Specialist Services.

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