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Tax Implications of Working from Home During COVID-19: 10 Employer FAQs

Published:

March 31, 2021

Author(s):

Susan M. Johnson

Close to five million Canadians who didn’t usually work from home, did so in 2020 because of the COVID-19 pandemic. Even as public health restrictions ease and mass vaccination roll-outs continue across Canada, working from home will remain a reality. As the 2020 tax filing deadline fast approaches, employers and employees still have questions about the tax implications of working from home in 2020. In response to concerns about the Canada Income Tax Act’s rules for the deductibility of home office expenses, the Canada Revenue Agency (CRA) has taken significant steps, adopting a number of administrative concessions in relation to employer-provided benefits, to ease the burdens on both employers and employees in connection to employees claiming expenses related to working from home.

Here are the answers to 10 questions employers and employees are asking us about how employees can claim home office expenses of working from home during the COVID-19 pandemic, and the related tax responsibilities of employers. Our answers don’t address any cross-border or permanent establishment issues associated with employees working from home in a province or a country different from that in which the employer is carrying on its business. In those cases, contact the Tax Solutions Team @ McInnes Cooper for specific guidance.

1. What are the current tax rules for claiming home office expenses?

The Canadian Income Tax Act currently permits a taxpayer to deduct the cost of office supplies and a portion of the costs related to the use of their workspace in their home, provided the taxpayer satisfies all of these criteria:

The supplies are used directly in their work while carrying out employment duties.
They are required by their employment contract to pay their own expenses and maintain a workspace in their home while carrying out their employment duties.
They weren’t, and won’t be, reimbursed by their employer for the cost of any expenses.
They didn’t receive an allowance (that is, the amount wasn’t and won’t be included in their income).

To deduct the portion of the costs related to the use of their in-home workspace, the employee must use the workspace for work more than 50% of the time and use it exclusively to earn employment income, and on a regular and continuous basis use it for meeting clients and other persons while carrying out their employment duties.

2. Have the tax rules for claiming home office expenses changed due to COVID-19?

No; these rules haven’t changed. However, the CRA has provided some relief by introducing two simplified methods, the Temporary Flat Rate Method and the Detailed Method, for employees to claim home office expenses they incurred while working from home during COVID-19.

3. Who’s responsible for what in relation to an employee’s ability to claim home office expenses?

The taxpayer bears the burden of meeting the eligibility criteria for claiming home office expenses. However, employers also have responsibilities and corresponding tax implications in connection with employees working from home because of COVID-19. To support employees working from home because of COVID-19, many employers implemented one of these approaches:

Reimbursed employees for certain expenses they incurred to enable them to work from home.
Provided employees with an allowance.
Supplied employees with office furniture and/or office equipment (Home Office Assets), either by allowing employees to borrow them from the office, or by acquiring and supplying employees with them to enable employees to work from home in the same or similar way as if they’d been working in the office.

It’s likely that an employer who did any of these things has provided the employee a “benefit”: a good or service an employer gives to an employee, which can include an allowance, a reimbursement or a material acquisition in respect of the employee’s employment. An employer that provides a benefit to an employee has the responsibility to do all of these things:

Determine if the benefit is taxable.
Calculate the value of the benefit.
Calculate the payroll deductions.
File an information return.

4. Is reimbursement of home office expenses a taxable benefit to the employee?

A reimbursement for employment-related expenses isn’t generally taxable. However, reimbursements without a receipt and reimbursements for capital purchases, such as home office furniture and home office equipment, might be taxable. In the context of COVID-19, the CRA has agreed to treat the first $500 reimbursed to an employee by the employer for expenses related to the acquisition of personal computers and/or Home Office Assets as non-taxable. This means that for the 2020 taxation year, where the employer reimbursed an employee’s expenses up to $500 (supported by receipts), the employer doesn’t have to include that $500 in the employee’s income, and doesn’t have to include that amount on the employee’s T4 Slip, for the 2020 taxation year. Any amount reimbursed in excess of the $500 is a taxable benefit, and the employer must include that amount in the employee’s income for the taxation year.

5. Are allowances for home office expenses a taxable benefit to the employee?

Allowances are a taxable benefit to the employee, and the employer is required to report the value of the allowance on the employee’s T4 Slip. An allowance is also taxable whether or not the taxpayer can claim the amount as an expense. An allowance is a periodic or lump-sum amount an employer pays to an employee in addition to their salary or wages to help them pay for certain anticipated expenses, without requiring the employee to support such expenses with receipts. An allowance usually meets all of these criteria:

It’s a pre-determined amount not based on an actual amount.
It’s for a specific purpose.
It allows the employee to use that amount as they choose without the need to provide receipts.

6. Is the employer’s supply of Home Office Assets a taxable benefit to the employee?

It depends on the particular circumstances. It’s the CRA’s position that an employee receives a taxable benefit where an employer pays for, or gives the employee, something that’s personal in nature. On one hand, it’s arguable that supplying an employee with Home Office Assets for the purposes of enabling them to work from home in the same or similar way as they would if they were working in the office isn’t a taxable benefit. On the other hand, supplying an employee an asset that will be used in the employee’s home inherently has some personal use and/or personal benefit incidental to the business use, such that a taxable benefit could be conferred on the employee.

Relevant Factors. In its 2004 decision in McGoldrick v. R, the Federal Court of Appeal noted that “any material acquisition in respect of employment which confers an economic benefit or advantage on a taxpayer and does not constitute an exception which falls within [the Act], will be treated as taxable benefit.” It’s the CRA’s position that any economic benefit received or enjoyed by the employee in respect of their employment must be included in the employee’s income. Where an employer has supplied an employee with Home Office Assets, the CRA can, among other things, consider any or all of these factors to determine whether an employee has received an economic advantage:

How much is being or was spent on the Home Office Assets for each employee.
Whether different circumstances apply to different employees.
Whether the employee is required to, or chooses to, work from home.
Whether the employee is provided the same or similar office equipment and/or office furniture while working in the office.
Whether the employee will own the Home Office Assets after the employee is no longer working from home, or whether there’s a process and/or mechanism in place to ensure Home Office Assets are returned to the employer.

“Primary Benefit”. Where an employer loaned an employee employer-owned assets, such as computers and various pieces of office furniture, to enable them to work from home during 2020 because of COVID-19, it’s unlikely the CRA will treat this supply as a taxable benefit to the employee. However, it’s not clear how the CRA will treat the supply where the employer purchased Home Office Assets specifically for the employee’s home. In the McGoldrick case, the Court decided that “[w]hen a thing is provided to an employee primarily for the benefit of the employer, that thing does not constitute a taxable benefit if the personal satisfaction is simply incidental to the business purpose” (paragraph 9). This means that if the employer can show that the Home Office Assets it acquired for the employee is for the employer’s primary benefit, it might not be considered a taxable benefit to the employee, and the employer doesn’t have to include the value in the employee’s income for the taxation year. Importantly, it’s the employer’s responsibility to determine whether the employee or the employer is the primary beneficiary of the benefit. No single factor is conclusive to determining the primary beneficiary of the Home Office Assets, but it’s the CRA’s view that an affirmative answer to any one of these questions might indicate the employer is the primary beneficiary:

Does the employer have a business purpose for providing the benefit?
Is the benefit required for the employee to perform the employment duties more effectively?
Is the benefit required to fulfill a condition of employment?
Does the employer have a moral or contractual obligation to provide the benefit to ensure that employees aren’t unduly subject to harm from performing the employment duties?

Employers are encouraged to use Guide T4130 Employers’ Guide – Taxable Benefits and Allowances, or consult our Tax Solutions Team @ McInnes Cooper to help assess whether its provision of certain Home Office Assets could be considered a taxable benefit for the employee.

Support for Non-taxable Benefit. If the employer doesn’t want its supply of Home Office Assets to be a taxable benefit to an employee, the best way to achieve this result is to ensure the employer remains the primary beneficiary of the Home Office Assets, and have support for the position that any economic advantage conferred on an employee is for the employer’s primary benefit. For example, the employer and the employee should determine how they will track the return of the Home Office Assets once the employee is no longer working from home.

Employer Documentation. If the employer has conferred a taxable benefit, the employer must include the value of the benefit (the fair market value of the Home Office Assets, as opposed to the amount the employer paid for it) in the employee’s income and include the amount on the employee’s T4 Slip.

7. Can an employee who received a reimbursement, an allowance, or employer-supplied Home Office Assets still be eligible to claim home office expenses in their 2020 taxation year?

There are certain circumstances in which the employee might still be eligible to claim home office expenses in their 2020 taxation year under one of two new CRA methods: the Temporary Flat Rate Method (Flat Rate Method) or the Detailed Method. Both methods are simpler and permit taxpayers who wouldn’t otherwise qualify to claim home office expenses under the current rules to claim these expenses on their 2020 tax return.

8. What’s the Flat Rate Method for claiming home office expenses?

The Flat Rate Method is one of two simplified methods for employees to claim home office expenses they incurred while working from home during COVID-19.

Eligibility Criteria. Under the Flat Rate Method, employees can claim expenses related to working from home if they meet all of these criteria:

The employee worked from home in 2020 due to COVID-19. Under the current rules, the employee must be “required” to work from home. However, in the context of COVID-19, the CRA will consider this condition met even where the employee chose to work from home.
The employee worked from home more than 50% of the time for at least four consecutive weeks in 2020.This condition is satisfied so long as the employee worked exclusively from home, performing all the duties they would normally perform in the office, for at least four consecutive weeks in 2020, whether they worked part-time or full-time, and whether they alternated working from home and working in the office.
The employee is only claiming home office expenses and isn’t claiming any other employment expenses. If the employee wants to claim other employment-related expenses, they can’t use the Flat Rate Method.
The employer didn’t reimburse the employee all of their home office expenses. This condition is satisfied even if the employer reimbursed some of the employee’s home office expenses, for example, where the employer reimbursed up to $500 to the employee for the purchase of personal computer equipment or home office furniture.

Deduction Amount. Employees who qualify can claim a flat rate deduction of $2 for each day they worked from home, to a maximum of $400. Days worked means the number of days the employee worked full-time or part-time hours, excluding days off, vacation days, sick leave days or other leaves of absence.

Claim Process. To claim home office expenses using the Flat Rate Method, the employee need only enter the number of days worked, not exceeding 200, under Option 1 – Temporary Flat Rate Method of the Form T777S – Statement of Employment Expenses for Working at Home Due to COVID-19 (T777S), and enter the result on line 22900 of their tax return. They must include a copy of the Form T777S in their tax return. Importantly, the employee doesn’t have to keep a record of their expense and the employer doesn’t need to provide the Form T2200S – Declaration of Conditions of Employment for Working at Home Due to COVID-19 (T2200S) or Form T2200 – Declaration of Conditions of Employment (T2200).

9. What’s the Detailed Method for claiming home office expenses?

Under the Detailed Method, employees can qualify to claim actual amounts they paid. The Detailed Method is a simplified version of calculating the employee’s 2020 home office expenses.

Eligibility Criteria. Employees can qualify to claim actual expenses under the Detailed Method if they meet all of these criteria:

The employee worked from home in 2020 due to COVID-19, or the employer required the employee to work from home. As with the Flat Rate Method, the CRA will consider this condition met even where the employee wasn’t required to work from home; if they were required, the requirement can be verbal or written, and doesn’t have to form part of the employment contract.
The employee was required to pay for expenses related to their home workspace. The requirement that the employee pay home office expenses is inferred; the employer need not expressly state this requirement, either orally or in writing. The employee can still use the Detailed Method if the employer reimbursed some of the home office expenses, but the employee can’t claim any expenses that the employer did or will reimburse.
The employee used the workspace for working more than 50% of the time for at least four consecutive weeks or it was only used to earn employment income, and used it regularly and continually for meeting clients, customers, and other persons while performing their employment duties. The work space can be a common or shared area, such as a kitchen table or family room, or a designated area, such as a room used only for work.
The employee’s expenses were used directly for the employee’s work.
The employee and the employer have completed either the Form T2200S or Form T2200. The Form T2200S is a shorter version of the T2200 on which the employer certifies the employee worked from home during 2020 because of COVID-19 and was “required to pay some or all their own home office expenses used directly in their work”. The employer need not expressly state this requirement, either orally or in writing, in order to certify the employee was required to pay some or all of their home office expenses. Based on the list of eligible expenses, it can be inferred the employee is required to pay the expenses, for example, home internet access fees.

Deduction Amount. If all criteria are met, the employee (whether salaried or commissioned) can claim a number of home office expenses, including a portion of rent paid for a house or apartment where the employee lives. Click here for a comprehensive list of eligible and non-eligible home office expenses and home office supplies.

Claim Process. If the employee is using the Detailed Method to claim home office expenses, they must:

Calculate their home office expenses based on size of the workspace at home and the number of days they worked from home in 2020. Click here to use CRA’s home office expenses online calculator.
Compete Option 2 – Detailed Method of the Form T777S – Statement of Employment Expenses for Working at Home Due to COVID-19. If the employee has other types of employment expenses, they must complete the standard Form T777 – Statement of Employment Expenses.

Employer Documentation. Employers should be prepared to provide the employee a completed Form T2200S. While an employer isn’t legally obligated to issue a signed Form T2200 to an employee, according to CRA Views Doc. 2013-0507001E5, the CRA expects employers to do so. The employer can determine whether they will issue the Form T2200S generally to all employees, or only to employees who request it. Importantly, the simplified T2200S shifts the burden of proving an employee meets the criteria for deducting home office expenses from the employer to the employee, and the employer need only certify the employee worked from home during 2020 and was required to pay some or all their home office expenses. Further, for 2020 only, the CRA will accept an electronic signature for the Form T2200S or Form T2200 and the “authorized person” need not be an authorized “officer” of the employer.

10. What if the employer didn’t report the correct amounts on an employee’s 2020 T4 Information Return?

Employers were required to file T4 Information Returns by February 28, 2021. If an employer notices any errors on the Information Returns filed or discovers they failed to report an amount they should have reported, it’s important to correct the T4 Slip in a timely manner. For example, if an employer fails to include the value of Home Office Assets in the employee’s income where they should, it’s considered a failure to report income, and penalties can apply. Similarly, if an employer erroneously includes the value of Home Office Assets in an employee’s income, the employee could find themselves in a higher tax bracket, and it’s unlikely they will be able to deduct the corresponding expenses since capital purchases usually aren’t deductible. An employer can file an amended T4 Slip to correct the T4 Slip information if it discovers an error or fails to report an amount. If you’re unsure whether you conferred a taxable benefit on an employee, contact the Tax Solutions Team @ McInnes Cooper to discuss your particular situation.

Please contact your McInnes Cooper lawyer or any member of our Tax Solutions Team @ McInnes Cooper to discuss this topic or any other legal issue.

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Tax Implications of Working from Home During COVID-19: 10 Employer FAQs

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