Inside a combat between taxpayer, Revenu Quebec over residence workplace area

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If you happen to do business 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 completely from residence in the course of the pandemic.

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

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A latest Quebec court docket case handled an unbiased contractor’s means to write down off his residence workplace bills in 2014. However earlier than stepping into the specifics of this case, let’s assessment the fundamental rule for deducting such bills if you happen to’re self-employed.

If you happen to’re an unbiased contractor (in different phrases, not an worker), you may deduct residence workplace bills from your small business revenue supplied your house workplace is your principal office. If it’s not, then it have to be used “completely for the aim of incomes revenue from enterprise and used on a daily and steady foundation for assembly purchasers, 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 improvement, 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 didn’t declare in his revenue. Because of this, he was reassessed, and varied quantities have been added to his taxable revenue 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 court docket 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 12 months, 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 best 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 full exterior floor of his residence, which measured 44 toes by 28 toes, or 1,232 sq. toes (sf), with a basement of the identical dimension, for a complete of two,464 sf. The taxpayer used three rooms in his residence completely 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 may 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 ground (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 widespread areas for circulation and entry to the rooms needs to be taken under consideration since these areas are used for each private and enterprise functions.

Taking this all under 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 full “internet usable space” after accounting for the thickness of the partitions and the shared areas. This produced a business-use proportion allocation of 28 per cent (420/1,505).

The decide reviewed the proof and turned to the Quebec Taxation Act, which states that an quantity can solely be deductible for Quebec revenue tax functions to the extent that the expense is “affordable.” The decide concluded it “doesn’t appear affordable to take care of that the partitions that delimit a residential work area 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 area.”

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Moreover, the decide mentioned an individual’s house is “in the beginning their habitat” and the “place of their personal life.” A taxpayer can actually select to do business from home and reserve a specific amount of area completely for this goal, however “the corridors, the stairwell or the opposite indoor motion areas are important to the private use of the premises.” Thus, Revenu Québec was “moderately justified” in contemplating that these widespread areas weren’t used “completely to earn revenue from a enterprise,” and they also can’t be thought of as a part of the eligible sq. footage.

The decide dominated, nonetheless, that the taxpayer may use the identical 22-per-cent allocation fee 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. Jamie.Golombek@cibc.com.

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