Payroll

Home Office Expense Deductions for Employees (COVID Updates)

Paul Sharpe, CPA, CA
/
January 14, 2021

Affiliate disclosure

This article will explain the changes relating to home office expenses that can be claimed by employees who worked from home in 2020.We’ll look at the different claiming methods and forms and when to use them, what employers need to do and what expenses employees can claim.

Home Office Expenses for Employees

This article will explain the changes relating to home office expenses that can be claimed by employees who worked from home in 2020.

We’re mainly looking at home office expense deductions from the employer’s standpoint. You’ll learn what has changed and what needs to be done so your employees can claim home office expenses.

There is also a detailed explanation on this topic on the CRA website. It’s surprisingly quite good and easy to follow!

Home Office Expense Topics Covered

  1. What is new with home office expense claims for employees?
  2. Detailed method (employer form T2200 or T2200s required)
  3. Temporary flat rate home office claim (simple version, no forms needed)
  4. Comparing the methods - which home office deduction should be used
  5. Employer requirements - what should employers do?
  6. What can employees deduct for home office expenses?

What's New with Home Office Deductions for Employees?

2020 was a big year for remote working and employees working from home. The CRA has updated eligibility requirements and has come out with additional ways for employees to claim home office expenses.

Temporary Simplified Flat Rate Claim

There is now a simplified flat rate method for employees to claim home office expenses even without their employer providing a form.

We’ll go into more detail on this in the next section, but the gist of it is that eligible employees can claim $2/day, up to a maximum of $400 against their employment income.

Eligibility Requirements Have Changed

Eligibility requirements changed for 2020 relating to employees claiming home office expense deductions. In general terms, the changes include:

  • No form necessary - The new “temporary flat rate” can be used even without an employer preparing a form T2200 or T2200S.
  • Contractual requirement not needed - It’s no longer a requirement that employees have an employment contract stating that they’re required to work from home. Verbal agreements are enough to claim home office expenses in 2020.
  • Frequency of home office use - The requirements for frequency of home office use were quite stringent in the past. This has been relaxed in 2020 with additional ways to qualify. More specifics below in the sections for the two methods.

We’ll go into more detail on the new eligibility requirements below for the two different claiming methods (detailed method and temporary flat rate method).

This CRA created Infographic is also quite helpful - way to go CRA!

New Simplified Form to Use (Form T2200s)

When using the detailed method to claim home office expenses, employers have to fill out and provide a form to their employees.

There are now two forms that can be used:

T2200 Declaration of Conditions of Employment

This form existed prior to 2020 and can be used when employees have more than one type of employment expense that they are required to pay. Home office is one of the expense types this form is used for.

It can also be used to claim employment expenses such as travel, vehicle and “other”.

T2200S Declaration of Conditions of Employment for Working at Home Due to Covid-19

This new form is only for employees working from home in 2020 due to COVID-19. It doesn’t include any information about other employment expense types.

It’s simpler than the T2200, so it’s easier to use if home office is the only expense type that your employees will need to claim.

Detailed Method for Home Office Expenses

The detailed method for claiming home office expenses has existed for years. It allows eligible employees to deduct specific expenses that they incurred while working from home.

For 2020 there are some updates to the eligibility requirements that make it easier for employees to qualify if they worked from home due to the COVID-19 pandemic.

New Eligibility Criteria - Detailed Method

Beginning with 2020 there are additional ways for employees to be eligible. The main difference is that now employees can be eligible if they can answer yes to all the following:

  1. The employee worked from home in 2020 due to the COVID-19 pandemic OR their employer required them to work from home (no written contract needed, written or verbal agreement OK)

    AND
  2. The employee was required to pay for their own expenses while carrying out duties of employment (no specific requirement for this to be in the employment contract)

    AND
  3. The employee’s home office was their principal place of employment (they work there more than 50% of the time) for at least four consecutive weeks OR the home office space is used exclusively for employment purposes and is used on a regular basis for meeting clients, customers or patients.

    AND
  4. The employer has provided and signed a copy of form T2200 OR form T2200S.

Previous Eligibility Criteria - Detailed Method

For some context, the previous eligibility requirements to use the detailed method were that employees needed to be able to answer yes to all of the following items:

  1. The employee's contract required them to use a portion of their home for work

    AND
  2. The employee’s contract required them to pay their own expenses while carrying on duties of employment

    AND
  3. The employee’s home office is their principal place of employment (they work there more than 50% of the time) OR the home office space is used exclusively for employment purposes and is used on a regular basis for meeting clients, customers or patients.

    AND
  4. The employer has provided a completed and signed copy of form T2200 to the employee.

If the employee could answer yes to all of those items, then home office expenses paid by the employee could be claimed provided that the costs weren’t already reimbursed to them.

The main differences you’ll see are that there is no longer a need to show that an employment contract has required the use of home office, and employees can qualify if they worked from home 50% or more for a period of 4 weeks as a result of the COVID-19 pandemic.

Temporary Simplified Flat Rate Home Office Claim

The other big change for 2020 is the addition of a simplified flat rate method to claim home office expenses.

Eligible employees may claim a flat rate of $2 per day up to a maximum of $400. No forms are necessary and employees don’t need to calculate actual expenses incurred. They just add up the number of days they worked from home and multiply by $2.

Eligibility Criteria - Simplified Flat Rate Method

The eligibility requirements to use the simplified method are a bit less stringent than the detailed method. Employees must be able to answer yes to all of the following:

  1. The employee worked from home in 2020 due to the COVID-19 pandemic (either they were required to work from home, or provided with the choice of working from home)

    AND
  2. The employee’s home office was their principal place of employment (they work there more than 50% of the time) for at least four consecutive weeks in 2020

    AND
  3. The employee is only claiming home office expenses and are not claiming any other employment expenses (such as vehicle or travel)

    AND
  4. The employer did not reimburse the employee for all of their home office expenses (it’s ok if the employer reimbursed some, but not all)

No forms are necessary to be prepared for this method. It’s a useful and simple option for employees who had to work from home for at least four consecutive weeks as a result of the COVID-19 pandemic.

Comparing the Home Office Expense Methods

We now know a bit more about both home office expense claim methods. You can also use this handy infographic provided on the CRA website as a quick comparison.

We’ve now got the gist of it, but it still may not be clear which method employers and employees should use. Try this two step process to determine which option to use.

1. Check eligibility requirements

The first thing to do is to check the eligibility requirements for both. If employees are only eligible for one method, then there’s your answer!

If employees are eligible for either method, then move on to the next step.

2. Check which method is most beneficial

If employees are eligible for either method, then it’s a good idea to determine which method could benefit them the most.

This can get a little bit tricky because the detailed method uses actual expenses incurred multiplied by an “employment use” percentage.

There are quite a few “if this, then that” type of statements that make up the calculation, but thankfully the CRA has created a calculator to help.

To compare eligible expense amounts under the detailed method and flat rate method you can ask your employee(s) to use this CRA calculator. The result will allow you to compare the deduction amounts under each method.

Still struggling to determine which method is better?

  • If the amounts are very similar, the temporary flat rate method requires less documentation and effort.
  • If the employee’s home office space is a small area like a kitchen table used only part of the time, the flat rate method may provide a higher deduction amount.
  • If you’re allergic to paperwork, then the temporary flat rate method may be the best approach for you.

If you’re still not sure, it’s never a bad idea to reach out to your accountant or payroll provider for some guidance.

What Do Employers Need to Do?

You’re already doing one of the most important things an employer needs to do, which is learning about the home office expense deduction for employees.

From here, you can help your employees understand their options and provide them with some guidance on the two methods. This CRA link is a great resource for employees.

If your employees will be using the detailed method, you will need to prepare one of either form T2200 or form T2200S and provide it to your employee(s). Ensure that you keep copies of the forms for your own records as well.

If your employees will be using the temporary flat rate method, then you don’t need to provide forms.

However, it’s still a good idea to make sure you could maintain documentation to show eligibility requirements of your employees should CRA ever ask to see proof. This could even be as simple as keeping an email discussing the matter with your employee.

What Expenses Can Employees Deduct?

With working from home being so common this year, it will be helpful to understand what can be deducted as home office expenses. Here’s a general rundown for most employees.

Temporary Flat Rate Method

Employees can deduct a flat rate of $2 per day that they worked from home up to a maximum of $400. No documentation needs to be prepared or submitted for this claim.

Detailed Method

Again, CRA comes to the rescue with a nice infographic explaining what can be deducted by employees.

Employees who earn commission income have the ability to claim a few more expenses than non-commission earning employees which you’ll see in the second column.

Just adding this CRA link one more time as it’s a great resource for both employees and employers. Hopefully now you’ve got everything you need to succeed through a combination of this article and the CRA info.

Other Avalon Resources

Payroll is a tough game to play well. There is a lot of red tape and potentially scary penalties if things are done incorrectly.

  • Payroll Support - Avalon can help with payroll setup and support if you want to hire us.
  • How to set up Wagepoint - We also have a free guide on how to set up and run payroll for your business using Wagepoint.
  • Manual Payroll Template - Looking for a free option? Check out our manual payroll template with accompanying videos giving step-by-step instructions on how it works.
  • Salary vs. Dividends - Our ever popular information on how to pay yourself from your corporation.

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Article by
Paul Sharpe, CPA, CA
.
Originally published
January 14, 2021
.
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