If portion of a house is used as a work space, could the expenses incurred in the maintenance and upkeep of that portion be deductible from the business income generated?
There are tax consequences in using one’s home or a portion of it for business. One of these relates to deductions that may be made from the income derived from business carried out at home.
The deductions made by a homeowner in relation to business operations she conducted in her home was front and centre in the case of Vandonkersgoed v. Canada, 2010 TCC 208.
The homeowner in that case, Renate, owned a three-storey home near a mountainside. There she operated “Villa Blanca”, a bed and breakfast style tourist accommodation.
In the ground floor was a large guest family suite. The suite was not used for personal purposes.
The main floor had two guest rooms with bathrooms, living and dining rooms, a hot tub area and a kitchen. The kitchen was not only used by the guests but by Renate as well.
The top floor was off limits to guests. This was the personal living quarters of Renate and her late husband. In terms of square footage, the top floor accounted for less than 20 per cent of the home.
Renate’s business was adversely affected by a forest fire that put a damper on tourist activities in the area. Occupancy went down, and Renate sustained business losses for three years.
In her income tax returns Renate declared losses arising from her business. After consulting her accountant, Renate allocated 30 percent of the expenses related to the upkeep of the home as personal expenses. Seventy percent of the expenses were treated as business expenses.
Initially taking the position that the entire property was Renate’s self-contained domestic establishment, the Canada Revenue Agency (CRA) issued reassessments for the taxation years in question. After Renate made her objections known, the CRA agreed that the ground floor suite, but not the main floor where the guest rooms and the kitchen were located, was used for business.
The Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) defines “self-contained domestic establishment” as “a dwelling-house, apartment or other similar place of residence in which a person as a general rule sleeps and eats”.
The case turned on the applicability of paragraph 18(12)(b) of the Income Tax Act which restricted losses arising from the business use of one’s home. In particular, paragraph 18(12)(b) provides that “the amount for the work space that is deductible in computing the individual’s income for the year from the business shall not exceed the individual’s income for the year from the business”.
Renate filed her returns on the basis that the loss restrictions in paragraph 18(12)(b) of the Income Tax Act did not apply to her business.
On appeal by Renate from the CRA reassessments, the Tax Court of Canada held that the loss restrictions did not apply. The Court found that “the self-contained domestic establishment” was limited to the top floor since no portion of it was used in her business. Neither were the expenses related to the top floor deducted by Renate.
The tax judge stated that Renate “used a 30 percent allocation in respect of the personal use portion of the Villa Blanca property related expenses” and “this was entirely reasonable on the evidence, given that the private quarters constituted less than 20 percent of the floor space” and recognizing as well the shared-use of the kitchen.
The tax judge thus directed a reassessment “to the extent that anything more than 30 percent of the total Villa Blanca property related expenses, being insurance, interest, maintenance and repairs, property tax and utilities, were treated by the CRA as non-deductible personal residence expenses”. In other words, the expenses exceeding 30 percent of the property related expenses were deductible from Renate’s income from the operation of Villa Blanca.
To a number of self-employed and business-minded individuals, devoting work space at home makes sense. But before commencing any business at home, one must pay heed to what the Income Tax Act has to say regarding this and similar arrangements. Obtaining the advice and assistance of an accountant and even a tax lawyer may also be desirable, if not necessary. That way, one is able to take full advantage of the benefits of maintaining a business at home from a tax standpoint, and avoid a visit from the taxman as well.