The home office deduction for business owners

There are three different home office deductions in Canadian tax law, and they are not variations on one rule. Which one applies depends on how you are set up. Most of the confusion we see comes from somebody applying the unincorporated rules to a corporation, or the corporate rules to an employee.

Route one: an unincorporated business

If you operate as a sole proprietor or in a partnership, you deduct business-use-of-home expenses directly against business income. Two conditions, and you only need to meet one of them:

1. The space is your principal place of business, or
2. The space is used exclusively to earn business income and is used on a regular and continuous basis for meeting clients, customers or patients.

The second condition is a single test with two halves. Exclusive use on its own is not enough, and neither is occasional client meetings in a room you also watch television in.

The claim is proportional. Measure the office and divide by the total finished area of the home. A 200 square foot office in a 2,000 square foot house gives 10%. If the room does double duty, reduce the percentage further by the hours of business use.

Apply that percentage to heat, electricity, water, home insurance, property taxes, mortgage interest, rent, and general maintenance and repairs. The internet is claimed on its business-use share rather than the floor area share. Repairs to the office itself are deductible in full, while repairs to areas with no business use are not deductible at all.

Two limits worth knowing:

• The deduction cannot create or increase a business loss. Anything disallowed for that reason is carried forward indefinitely and used against business income in a future year.
• Do not claim capital cost allowance on the house. It is technically permitted, and it puts the principal residence exemption on that portion of the home at risk when you sell. The deduction is small. The tax on a share of the gain on a Toronto or Ottawa house is not.

Route two: an employee

Employees are on a much shorter list. You need a signed form T2200 from the employer, and the workspace has to be where you principally perform your duties, or be used exclusively for work and regularly for meeting people in the course of your job.

A salaried employee can deduct a share of utilities, maintenance and rent. A salaried employee cannot deduct mortgage interest, property taxes, home insurance or capital cost allowance. Commission employees can add property taxes and home insurance, capped at their commission income.

The temporary flat rate method that ran during the pandemic years no longer exists. Claims are back to the detailed method with employer certification.

Route three: an owner-manager of a corporation

This is the one that gets handled badly, because the corporation is a separate person and it does not live in your house.

Your corporation cannot simply deduct a slice of your mortgage. There are two workable structures:

Charge the corporation rent. Put a written agreement in place setting a reasonable rent for the space. The corporation deducts the rent. You report it as rental income personally and deduct the proportionate share of mortgage interest, property taxes, insurance, utilities and maintenance against it. Set at a sensible level, the net personal income is close to nil and the corporation has a real deduction. Keep the rent defensible against what comparable space would cost, because an inflated rent is the first thing challenged.

Reimburse under an accountable arrangement. The corporation reimburses documented home office costs it would otherwise bear. This needs actual receipts and a policy, and works best where the amounts are modest and specific, such as a dedicated business internet line.

There is a third possibility, which is that the corporation issues you a T2200 and you claim as an employee under route two. That is the most restrictive of the options and is rarely the best answer for an owner who has a choice, since it drops mortgage interest and property taxes from the claim.

Which route produces the better result depends on your marginal rate, the corporate rate and how much you are already drawing. It sits alongside the salary and dividend mix as part of the same decision, and we work through both together at year end.

What to keep

A CRA review of a home office claim asks for the same things every time:

• Measurements of the office and of the home, ideally a floor plan
• Photos showing the space in use for business
• The underlying bills for every expense in the calculation
• The rental agreement or reimbursement policy, if you are using the corporate routes

The mistakes we correct most often

Over-measuring the space, including hallways and shared areas. Claiming 100% of the internet bill. Deducting mortgage principal rather than interest. Expensing a full basement renovation in the year it was done, when the improvement portion should have been capitalised. And running a corporate claim with nothing in writing, which leaves a deduction on the T2 with no supporting arrangement behind it.

None of these are hard to get right at the start of a year. They are expensive to unwind after a return has been filed.

All of our corporate and personal tax work

General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.