CRA signals a willingness to simplify home office tax deductions for employees
Almost overnight, the COVID-19 crisis launched many Canadian businesses into the most ambitious remote-work/home office experiment ever attempted. Widespread lockdowns forced businesses to either shutter or have their employees work from home until further notice. Many still are—and have no plan to return to the office.
Indeed, many a CFO and accounting department embraced the potential cost savings associated with having employees work remotely and, when possible, eventually downsizing their organization’s commercial property footprint. CEOs eager to find new efficiencies and buttress their battered bottom lines jumped on board. Others did so reluctantly, worried about the impact on productivity and workplace culture. Still, if they could make working remotely work, cutting expenses and giving employees added flexibility, eliminating commute times and providing better work-life balance, then why not? They had few alternatives with pandemic business closures in full force.
But as with any of life’s inevitabilities—death, taxes, government complexity—the Canada Revenue Agency (CRA) would likely have an impact on this grand experiment’s success. Specifically, many employers wondered how the CRA would interpret or modify rules around home-office expense deductions. Those rules state that employees whose home is their principal place of work, for at least 50 per cent of the time, may claim various expenses related to the maintenance of a home office. To be eligible to make the claims, employers must sign a T2200 form (known as the Declaration of Conditions of Employment form) confirming the claimant’s work-from-home status.
Of course, the coronavirus pandemic has seen a dramatic increase in the number of Canadians who would potentially qualify for a T2200 sign-off from their employer, creating widespread administrative headaches for organizations across the country. Recently, at a consultation hosted by the Canadian Chamber of Commerce, the CRA clarified that Canadians who have been forced to work from home due to COVID-19 should be eligible for home office deductions—even if they haven’t worked from home for half the year—while signaling a willingness to simplify the T2200 compliance process with a shortened version of the form. The draft form is widely circulated by the CRA but not posted on their website.
Initial indications suggest that rather than filing the shorter T2200 form with their tax return, employees would merely need to have it signed by their employer and be prepared to submit the form to the CRA if requested. Employers will still need to attest that employees who work remotely are required to cover home office expenses in order to claim a deduction—importantly, remote work requirements would not need to be spelled out in employment agreements—as well as any reimbursement provided to employees to cover those expenses. Employees would be able to deduct home office expenses if they were required to work remotely for half of one or more periods of four consecutive weeks over the course of 2020.
But questions remain about this potential new policy direction. Will the remote-work eligibility parameters be permanently expanded due to COVID-19? Exactly how much in expenses will employees be permitted to claim if or when a simplified T2200 form is officially introduced? What, exactly, will qualify as a home office expense moving forward? Would that definition be expanded to include capital expenditures that didn’t previously qualify?
The simplification of the T2200 form could be good news for business. It would simplify the process of allowing employees to work from home, and could help employers make such a shift permanent, if doing so suits their operational model and workplace culture. In some cases, organizations might opt to provide qualifying employees (those whose positions allow for remote work) with an annual work-from-home allowance to cover the cost of home office expenses. Again, this would offer organizations the opportunity to potentially reduce their property lease expenses over time and lower their overhead costs, while any allowance or remote-work compensation would be tax deductible.
But the forms will still need to be completed and will increase the administrative workload on employers whose primary focus has been—and will likely continue to be—finding ways to ensure their business survives the pandemic, or capitalize on the many new growth opportunities emerging across some sectors. If the work-from-home trend becomes a permanent workplace fixture where it wasn’t before, T2200 eligibility and compliance rules will need to be communicated to employees and reviewed on a regular basis. HR and communications teams will need to be on call (or brought in) to help manage the task. Many stakeholders are of the view that instead of simplifying the T2200 form, there could be a small amendment to the existing T4 slip to make the process more efficient.
Lastly, we’ve seen a significant uptick in CRA audits related to federal COVID-19 benefits such as the Canada Emergency Wage Subsidy—so much so that, for some organizations, the burden of proving eligibility has outweighed the benefits of taking the subsidy in the first place. We can assume that the CRA will likely increase Form T2200 audits, particularly for Canadians who have not claimed home office expenses in the past. Hence, having a paper trail of expenses incurred is essential to prove they were incurred under the current rules for home-office expenses.
The CRA would be well advised to pay close attention to these and other concerns being raised by employers. Any simplification of Form T2200 compliance requirements should be exactly that—and not a costly new burden for organizations who need more flexibility and less bureaucratic red tape now than ever before.
Hari Krishnan, CPA, CA
Tax Manager
