Basement Businesses
Don't worry. Your own business has other benefits, and you'll get to remember a whole lot of them every April, when you find out how much of your money you're keeping out of the tax collector's hands.
Your small business doesn't have to be in the basement, of course, but that location often gives people the biggest tax writeoff, says chartered accountant Sheldon Buchalter. If your home is a bungalow with a big full basement, you may well be able to claim half of many of the costs of your house.
Buchalter shudders at the number of self-employed people who don't know they can claim the cost of a home office, or forget about it from one April to the next.
"I see it all the time," he says. "I had one guy who had been missing a tax deduction of five grand a year for the last four years. That's close to 10 grand he shouldn't have paid the government."
Buchalter himself has an office in his home as well as his cheerfully cluttered, fountain-bedecked place of business at Tepperman Buchalter LLP. He doesn't try to claim the expenses at home, though.
"You know what they say. Pigs get fat. Hogs get slaughtered," he says. "I'm not using the office at home every day. I use it maybe 10, 15 times a year. It has to be regular, continuous use to be claimed. It's intended for when you have no other office or place to do business."
What Buchalter does do, though, is claim for the mountains of clients' files he stores in his basement.
"If I rented a storage space, it would probably cost $300 a month. Instead, our company pays me $75 a month."
The situation can be much more clear cut if your home office is the only place you have to do business. You may not, in that case, even have to set aside a room in the house that's used for nothing but business, although you're much safer with the tax collector if you do. Either way, you need to figure out how much of the expenses for your entire home could reasonably apply to the business.
The Canada Revenue Agency prefers that you get a tape measure out of your tool drawer, but Buchalter will have none of that.
He usually tells his clients to figure things out on the basis of one floor, say, in a three-floor house, or one room out of however many you have, not counting bathrooms or closets, no matter how big they are.
So what's eligible?
"You can claim your cleaning lady," Buchalter chortles, "or at least a part of her."
Other claimable expenses are more obvious. They include mortgage interest (but not the part of the payments that goes toward the principal owing), property taxes, heat, hydro, water and home insurance.
"Don't forget cutting the grass and shovelling the snow," Buchalter says. "You have to make the place attractive for the clients."
Repairs and renovations come into the picture, too, but they're a tougher call in terms of what to claim, and tax advisers and collectors may have differing opinions on what's legitimate and what's not.
"I tell my clients not to claim any portion of general house repairs," Buchalter says. He points to a new roof as an example. Sure, your office won't be much good to you if the rain is as bad inside as out, but then the house won't be habitable either, and won't be worth anything when you go to sell it.
Similarly, don't claim the cost of a major renovation - tearing down and putting up walls, and the like - to create your home office.
Besides, that kind of work could easily cost $20,000 or more, and that's not the kind of money you can claim as an expense in any one year.
Meanwhile, the courts have been pushing the tax collector into a kinder corner in recent years when it comes to expense claims for home offices.
"You can have a bit of personal use in a home office these days, and CRA still says okay," Buchalter says. "That's a big change in recent years."
Buchalter doesn't like to go too far with the tax rules.
"I tell people they can't use their living rooms or dining rooms as a home office," he says. "But a bedroom or a den is okay."
Getting back to the computer in your home office, if you bought the machine since March 2007, you can write off 55 per cent of the cost in the first year, with the rest to follow in later years. That's up from only 30 per cent to start - and may get a little closer to the speed with which computers collapse into the category of obsolete and worthless.
All the deductions you do take, though, can add up, so it's not surprising that the tax collector has thrown a wrench into the works. You have to make enough of a profit on your business to cover the home-office expenses, or you don't get to claim them in the current year.
The tax collector is giving you more latitude with your other expenses, producing a loss in your business even when you have a "day job" and are using the business loss to reduce the tax you owe on your regular employment income.
Whether you're in a home office or an outside office, however, the Canada Revenue Agency may take exception to the kind of business you run and whether you're allowed to claim expenses against your revenue at all.
"It's the hobby issue," Buchalter says.
If you start a mortgage lending business, even the tax collector isn't likely to accuse you of having so much fun that you shouldn't be allowed to deduct expenses. But if you love collecting stamps, and then decide to go into the business of buying and selling them, and you lose money ..."
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