Inside a battle between taxpayer, Revenu Quebec over residence workplace house

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Jamie Golombek: Taxpayer argued thickness of partitions needs to be subtracted from calculations as a result of they don’t seem to be ‘useable areas’

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For those who make money working from home, both as an worker or unbiased contractor, you could possibly write off a portion of your house workplace bills come tax time. This has been of specific curiosity up to now few years for the tens of millions of workers (myself included) who labored solely from residence throughout the pandemic.

For the 2020, 2021 and 2022 tax years, the federal government even launched a simplified flat charge methodology for workers to calculate their work-from-home bills, somewhat than having to maintain detailed information of all their particular bills after which apportion them by sq. footage. (No phrase but on whether or not this methodology will likely be allowed in 2023).

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A latest Quebec courtroom case handled an unbiased contractor’s means to jot down off his residence workplace bills in 2014. However earlier than moving into the specifics of this case, let’s evaluation the fundamental rule for deducting such bills in the event you’re self-employed.

For those who’re an unbiased contractor (in different phrases, not an worker), you may deduct residence workplace bills from your small business earnings supplied your house workplace is your principal workplace. If it’s not, then it should be used “solely for the aim of incomes earnings from enterprise and used on an everyday and steady foundation for assembly shoppers, clients or sufferers of the person in respect of the enterprise.”

The latest Quebec tax case concerned {an electrical} engineer who used a portion of his residence in working his enterprise. Between 2011 and 2014, the taxpayer provided his providers to a big Quebec-based engineering firm that gives advisory providers in mechanical engineering, electrical energy, sustainable growth, structural and civil engineering.

The corporate was the topic of an audit by Revenu Québec, which found invoices for skilled charges issued by the taxpayer and presumably paid by the corporate, however which the taxpayer did not declare in his earnings. Because of this, he was reassessed, and varied quantities have been added to his taxable earnings for the years in query. A portion of the taxpayer’s enterprise bills have been additionally disallowed.

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The taxpayer appealed the reassessments of the 2011 and 2013 tax years, and settled out of courtroom for these two years. In a 2019 signed settlement, Revenu Québec and the taxpayer agreed that the bills for the enterprise use of his residence have been to be apportioned utilizing a 22-per-cent allocation.

For the 2014 tax yr, nonetheless, Revenu Québec was solely ready to permit 17.05 per cent of his residence workplace bills, whereas the taxpayer argued it needs to be 28 per cent. The matter ended up within the Court docket of Québec, the place the dispute concerning the portion of deductible residence workplace bills hinged on the right way to correctly measure the sq. footage of his residence, and which parts of his residence have been used for enterprise functions.

Revenu Québec’s strategy was to easily take the overall exterior floor of his residence, which measured 44 ft by 28 ft, or 1,232 sq. ft (sf), with a basement of the identical dimension, for a complete of two,464 sf. The taxpayer used three rooms in his residence solely for skilled use. These three rooms represented an space of 420 sf. Revenu Québec’s place, due to this fact, was that 17.05 per cent (420/2,464) of the taxpayer’s residence was used for work, so 17.05 per cent of the house’s bills might correctly be deducted for tax functions.

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The taxpayer disagreed, arguing that the thickness of the partitions of the basement (16 inches) and the bottom flooring (13.5 inches) needs to be subtracted from the calculations since they don’t seem to be “usable areas.” He equally argued that every one the inside partitions needs to be excluded since they’re additionally unusable, and that the corridors, stairwell and different frequent areas for circulation and entry to the rooms needs to be taken into consideration since these areas are used for each private and enterprise functions.

Taking this all into consideration, the taxpayer recalculated the enterprise use of his residence by taking the 420 sf of the three business-use solely rooms, however dividing it by 1,505 sf, which represented the overall “internet usable space” after accounting for the thickness of the partitions and the shared areas. This produced a business-use share allocation of 28 per cent (420/1,505).

The choose reviewed the proof and turned to the Quebec Taxation Act, which states that an quantity can solely be deductible for Quebec earnings tax functions to the extent that the expense is “affordable.” The choose concluded it “doesn’t appear affordable to keep up that the partitions that delimit a residential work house are ineffective for the train of the skilled exercise that takes place there. Whether or not for climatic causes, privateness or pure comfort, these partitions are an integral a part of this house.”

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Moreover, the choose mentioned an individual’s house is “firstly their habitat” and the “place of their personal life.” A taxpayer can definitely select to make money working from home and reserve a certain quantity of house solely for this objective, however “the corridors, the stairwell or the opposite indoor motion areas are important to the private use of the premises.” Thus, Revenu Québec was “fairly justified” in contemplating that these frequent areas weren’t used “solely to earn earnings from a enterprise,” and they also can’t be thought of as a part of the eligible sq. footage.

The choose dominated, nonetheless, that the taxpayer might use the identical 22-per-cent allocation charge for his residence workplace bills that he had beforehand negotiated with Revenu Québec within the settlement settlement for the 2011 and 2013 tax years.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. [email protected].

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