Home Office When You Are Incorporated: Rent, Reimburse, or Neither
A sole proprietor with a home office claims a percentage of their household costs and the matter is settled. An incorporated owner cannot do that, because the home belongs to you and the business belongs to the corporation. They are two different taxpayers.
That surprises people who incorporate and assume their existing home office claim simply carries across. It does not, and continuing to claim it the old way is a common and quietly expensive error.
There are three legitimate routes.
Route 1: The corporation reimburses you as an employee
The most common and usually the cleanest.
You are an employee of your corporation. Your corporation reimburses you for the business portion of your home costs, deducts the reimbursement, and no taxable benefit arises provided the amount genuinely reflects business use.
What makes this hold up:
- A written policy or resolution recording that the corporation requires you to maintain a workspace at home and will reimburse the business portion
- A calculation of the business-use percentage, by area or by rooms
- Actual payment from the corporation to you, traceable in the bank records
- Receipts kept for the underlying household costs
What breaks it: paying yourself a round number every month with no calculation behind it. That is an allowance, not a reimbursement, and an allowance not based on actual costs is generally a taxable benefit to you.
Route 2: The corporation rents space from you
The corporation signs a lease with you personally and pays rent at a reasonable market rate for the space.
The corporation deducts the rent. You report it as rental income personally, and against it you may deduct the corresponding share of your mortgage interest, property tax, insurance, utilities and maintenance.
This is legitimate and it carries two real cautions.
The rate must be defensible. Charging your corporation $3,000 a month for a spare bedroom in Ottawa will not survive a question. Anchor it to something: a comparable commercial rate per square foot, or what the space would actually rent for.
Do not claim capital cost allowance on your home. Claiming CCA on part of your principal residence can compromise the principal residence exemption for that portion, which risks a tax bill on sale far larger than the annual saving. This is one of the clearest cases in Canadian tax where a small recurring deduction buys a large future problem.
Route 3: You claim employment expenses on a T2200
The corporation certifies on a T2200 that you were required to maintain a home workspace and were not reimbursed, and you claim the eligible portion personally.
This is the most restrictive route. Employees can claim a narrower set of costs than a business can, and notably cannot claim mortgage interest or property tax the way a self-employed person can. The workspace must also meet a test: either it is where you principally perform your duties, or it is used exclusively for work and regularly for meeting clients.
Use this when the corporation cannot afford to reimburse, or where a reimbursement has not been set up in time.
Which route to use
| Situation | Route |
|---|---|
| Corporation has cash, you want it simple | Reimbursement |
| You want to deduct mortgage interest and property tax against the income | Rent |
| The space is substantial and clearly separable | Rent |
| Corporation is short of cash this year | T2200 |
| You want the largest deduction with least risk | Reimbursement, usually |
Do not use more than one route for the same space. Renting the space to the corporation and claiming employment expenses for it is double-counting.
Calculating the business portion
Two accepted methods:
By area. Workspace square footage divided by total finished square footage. Most defensible, and it needs a measurement you can produce, not an estimate.
By rooms. Rooms used for business divided by total rooms, provided rooms are roughly comparable in size.
Then apply that percentage to household costs: heat, electricity, water, insurance, maintenance, internet, and for the rent route also mortgage interest and property tax.
If the space is used partly personally, reduce the percentage again by the share of time it is business use. A dining table used as a desk for six hours a day is not a 100% business space.
What the CRA looks at
This is a reviewed area, and the questions are predictable:
- Is there a written agreement or policy?
- Does the amount match a documented calculation?
- Is the space genuinely used for business, and how much of the time?
- Are the underlying household receipts available?
- Did the money actually move, or is this a bookkeeping entry?
That last one catches people. A reimbursement recorded but never paid is not a reimbursement; it is an amount owing to you, which drifts into shareholder loan territory.
The link worth knowing about
If your home office qualifies as your principal place of business, trips from it to clients become business kilometres rather than commuting. That is frequently worth more than the home office deduction itself. The mechanics are in vehicle expense deductions.
If you are not incorporated
The rules are different and generally simpler. See the home office deduction.
Pick a route, measure the space, move the money
- Pick one route and write it down. A resolution or a lease, dated.
- Measure the space. Keep the measurement.
- Calculate the percentage and apply it to real costs.
- Actually move the money, monthly or annually.
- Keep the household receipts for six years.
None of that is difficult. All of it is the difference between a deduction that survives a look and one that does not.
If you incorporated recently and have been claiming your home office the way you did as a sole proprietor, that is worth correcting before it compounds another year.
More on accounting
Written by