In the past, our clients have frequently enquired about claiming tax deductions for car expenses and home office expenses. Let’s review how the COVID-19 pandemic may affect these potential
tax deductions for you.
If you are not yet incorporated (i.e. operating as a sole proprietor), you are allowed to claim a portion of your car expenses (with some limitations) based on your business mileage compared to total mileage driven for the year. Keep in mind that direct travel between home and office does not qualify as business travel. For those who are incorporated and have a professional corporation (PC), unless they are able to substantiate a very high business usage rate (generally 75% or more), we have recommended that you own the vehicle personally, pay all car expenses personally and have the PC reimburse you with a tax-free car allowance based on the number of business kilometers driven. The pandemic has likely resulted in fewer trips to the office, but since these trips were considered as personal, not business, it will likely not have much of an impact on your business driving and eligibility for the tax-free car allowance. Any business travel during the pandemic (i.e. travel to bank, accountant/lawyer, etc.) would still qualify for a tax-free car allowance.
Prior to the pandemic, we generally discouraged all clients from claiming home office expenses given that they likely did not meet at least one of the following required conditions to deduct them:
- Worked primarily from home office, which generally means at least 50% of the time; or
- Used the home office to earn employment income, the use of which was on a continuous/regular basis for meetings with clients/patients.
During the office closure period, many clients were able to connect with their office directly from home to carry out many of their in-direct responsibilities and at times may have also done some
virtual consultations from their home office. Whether or not this will allow you to meet the “worked primarily” requirement noted above remains to be seen. We have also heard that the tax department may make changes to the home office expense rules to simplify them which may possibly allow you to meet the requirements.
If we can reasonably conclude that you may be able to deduct home office expenses, keep in mind that the deduction is limited to a reasonable portion of utilities, rent and relevant maintenance
expenses. Unfortunately, property taxes, insurance and mortgage interest do not qualify. The deductible portion is determined by how much space your home office takes up. For example, if your home office takes up 10% of the square footage of your entire home, you can claim 10% of the above noted expenses. Hence, it is likely that the actual deductible amount for home office expenses may be rather modest. In fact, if the resulting tax savings from the home office expense deduction is relatively small, you should consider whether it is even worth your time and effort, as it could potentially lead to a review or audit by CRA.
If a family member (i.e. spouse) works regularly at the office, it may be easier for that person to qualify to claim home office expenses assuming they worked from the home office on a regular
basis. Having your office computer accessible from home would help to substantiate a claim in the unlikely event of an audit.
About the Author
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or email david@dcy.ca / louise@dcy.ca / eugene@dcy.ca . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace
professional advice.
To view more COVID-19 news as it pertains to the dental profession, please click here.
