From: AlanBaggett@volcanomail.com   
      
   Home-based entrepreneurs - Tax breaks for the home office crowd: CRA SOTW    
      
   This article taken from CBC News but they did not supply the author’s name   
   – my apologies to them.   
      
   Home-based entrepreneurs - Tax breaks for the home office crowd   
      
   Hundreds of thousands of Canadians keep an office in their home that can   
   legitimately qualify for some kind of tax break.   
   You probably know someone in this category — your uncle Irving with the   
   home-based consulting business, your cousin Mary the freelance writer, or your   
   neighbour Fred the telecommuting employee. Each of these people may be able to   
   reduce their tax bill    
   by deducting all or part of the costs of earning income from work they do in   
   their own home.   
      
   But beware: the tax policies in this area can be tricky and the tax benefits   
   only go to those who successfully manoeuvre their way through the intricacies   
   of the Canada Revenue Agency. Even after those conditions are met, other rules   
   kick in to limit how    
   much can be deducted in any one year.   
   Simply having a home office isn't enough to generate some favourable tax   
   treatment. Getting a break from the tax department depends entirely on what   
   you use your home office for, as well as the nature of your work status. Most   
   employees, for instance,    
   can't deduct home office expenses unless they are required to maintain a home   
   office by their employer (more on that later).   
      
   It's far more advantageous, at least from a home office tax perspective, if   
   you are self-employed.   
   Self-employment and the home office   
   Self-employment is the fastest growing category of employment in this country,   
   with more than two million people falling into this category. Statistics   
   Canada estimates that about a third of all self-employed people work from   
   home. For some Canadians,    
   the journey into self-employment was launched after their previous job   
   disappeared in the recession. For others, the freedom of being their own boss   
   was the main driver. But no matter what the reason, the ability to claim home   
   office expenses is a big    
   selling point for the home-based entrepreneur.   
      
   But not every home office qualifies for tax breaks.   
      
   The Canada Revenue Agency will allow you to deduct eligible home office   
   expenses from home-based business income if one of the following two   
   conditions is met:   
    The home office must be the "principal" place of business. That means more   
   than 50 per cent of the time.    
    The home office is used exclusively for earning income and "on a regular   
   and continuous basis" for meeting customers and clients.    
      
   Once either condition is satisfied, then eligible home expenses related to   
   that home office can be deducted from business income. But there's a big   
   catch: The home expense deduction relating to the cost of living in the home   
   cannot be used to create a    
   tax loss (or increase a loss) for tax purposes.   
      
   So if your home business had a net profit of $10,000 (before home expenses are   
   taken into account) and you have $12,000 in eligible home expenses, you can't   
   report a $2,000 loss. What you can do, however, is report a zero income from   
   the home-based    
   business (applying $10,000 of the expenses to the $10,000 of income) and carry   
   forward the excess $2,000 loss to the following tax year, providing you still   
   have a qualifying home-based business.    
      
   What kind of expenses can be deducted?   
   Self-employed individuals pay a price for their freedom They aren't eligible   
   for employment insurance and they have to pay twice the CPP premiums that   
   employees do. But unlike employees, they also enjoy a wide range of reasonable   
   home expense deductions    
   that can be claimed. The key word here is "reasonable." Claiming home office   
   expenses that are out of line with other tax filers in the same line of work   
   invites an audit.   
      
   How much you can deduct depends on how much of your house your home office   
   occupies. If the home office occupies a tenth of the square footage of the   
   total home area (excluding hallways, bathrooms and kitchens), then a tenth of   
   the home's expenses can be    
   deducted. (In Quebec, only 50 per cent of eligible home maintenance expenses   
   can be deducted). Some of the eligible expenses for the self-employed crowd   
   include:   
    Utilities (heat, electricity, water, gas).    
    Property taxes.    
    Home insurance.    
    Mortgage interest (but not principal).    
    Condo fees and rent.    
      
   Home office expenses that are specifically related to the home-based business   
   don't need to be pro-rated; they can be deducted in full. A business phone,   
   printer paper, and toner cartridges would fall into this category. Those are   
   some of the more    
   obvious business expenses. But there are others.   
      
   "If you increase your mortgage to help finance the start-up of your business,   
   that portion of the mortgage interest that relates to the business is a   
   business expense which you can deduct regardless of whether or not your   
   business is profitable," writes    
   accountant Stephen Thompson in his 167 Tax Tips for Canadian Small Business   
   2009 (John Wiley & Sons).   
      
   And remember to keep your receipts to back up all expense claims. The CRA   
   doesn't like rough guesses. Form T2125 has a part that deals with the   
   calculation of what it calls "business-use-of-home expenses".   
      
   What about furniture and computers?   
   The cost of big-ticket items like desks or computers normally can't be   
   entirely written off in one year since they provide an ongoing benefit to the   
   business. They must be depreciated over several years through a process called   
   capital cost allowance.   
   The speed of the writeoff depends on the class of asset. For instance, office   
   furniture has a CCA rate of 20 per cent. So that $1,000 desk normally results   
   in a $200 deduction (except in the year of purchase, when only half of the   
   normal CCA rate applies.   
   )   
      
   Tax tip   
   If your home insurance goes up because of your home-based business, you can   
   deduct 100% of the increase.   
   Source: 167 Tax Tips for Canadian Small Business by Stephen Thompson   
      
   Computer hardware usually has a CCA rate of 45 or 55 per cent. But under a   
   special provision in the Jan. 27, 2009, budget, computers bought after budget   
   day and before Feb. 1, 2011, have a 100 per cent CCA rate.    
   Can I claim depreciation on my house?   
   Yes, but most tax experts say you shouldn't. Claiming capital cost allowance   
   on that portion of one's home that is occupied by the home office risks a   
   potentially bigger tax bill later on.   
      
      
   [continued in next message]   
      
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