Home office and vehicle expenses: what you can claim, and how to prove it

Working from home and driving to clients is ordinary for a small business in Metro Vancouver, and both can be deducted. But neither is a guess. Each comes down to a percentage and to records that support it.

This guide is for sole proprietors reporting on form T2125. The rules change once you are incorporated; the last section covers the difference.

The home office: two ways to qualify

You can claim business use of your home if the space meets at least one of two conditions:

• It is your principal place of business, meaning where you mainly carry on the business.
• You use it only to earn business income, and you use it on a regular and continuous basis to meet clients, customers or patients.

The second condition needs both halves. A room used only for work but where no clients ever come does not meet it. Someone with a separate rented office will usually fail the first condition as well.

Working out the percentage

The CRA asks for a reasonable basis, and area is the usual one:

Business-use share = office area ÷ total finished area of the home

A 100 sq ft office in a 1,000 sq ft home is 10%.

If the space is shared with personal life, such as a dining table by day or a guest room at weekends, the CRA also accepts factoring in time: the hours the space is used for business, divided by 24. If you run the business only part of the week or year, reduce the claim to match.

What the percentage applies to

• Renting: rent, tenant insurance, electricity, heat, water, internet, cleaning materials and minor repairs.
• Owning: the same running costs, plus home insurance, property tax and mortgage interest. Mortgage principal is never deductible.
• Not claimable: TV and streaming packages, and anything that serves the household rather than the business.

Capital cost allowance (depreciation) on the home is technically claimable, but it is almost never worth it. It can make part of the home ineligible for the principal residence exemption when you sell.

The limit people miss

Home office expenses cannot create or increase a business loss. If the business makes $3,000 before the home office and the home office comes to $5,000, you deduct $3,000. The other $2,000 carries forward to the next year, as long as you still qualify.

Vehicle: the percentage is kilometres

Business-use share = business kilometres ÷ total kilometres for the year

Record the odometer at the start and end of the year, because the total is half the calculation.

Business trips include driving to clients, collecting from suppliers, going to the bank for the business, attending trade shows, and moving between work locations.

Commuting between home and a regular place of business is personal driving, not business. If your home is your principal place of business, trips from home to clients do count.

What the vehicle percentage applies to

• Fuel or charging.
• Insurance.
• Maintenance and repairs.
• Licence and registration.
• Lease payments, or capital cost allowance if you own the vehicle.
• Interest on a car loan.

Parking and tolls on a business trip are separate. They are deductible in full and are not reduced by the percentage.

Leasing, capital cost allowance and loan interest on passenger vehicles are capped by limits the CRA sets each year. A more expensive car does not produce a proportionally bigger claim.

The logbook

For each business trip, record the date, the destination, the purpose and the kilometres. Paper, a spreadsheet and an app are all acceptable, as long as those four things are there and the totals reconcile to the odometer readings.

Without a log, the CRA has no basis for your percentage and can reduce or deny the claim. A log reconstructed from memory at year end is exactly what fails a review.

The CRA offers a lighter method once you have a full year on record. After a complete 12-month logbook, the base year, you can keep a log for a three-month sample period in later years, as long as the result stays within 10 percentage points of the base year. The CRA’s own example:

• Base-year annual business use: 49%.
• Business use in the base year’s April to June: 46%.
• Business use in this year’s April to June sample: 51%.
• This year’s figure: (51% ÷ 46%) × 49% = 54%.

Keep the base-year log for as long as you rely on it, and the fuel, insurance and repair receipts for every year either way.

If you are incorporated

The logic stays the same, but the mechanics differ.

• Home office: there are two usual routes. The company can pay you rent for the space, which is rental income to you and can affect the principal residence exemption. Or, if you draw a salary, you claim employment expenses using a T2200 signed by the company. That list is narrower: homeowners generally cannot claim mortgage interest, property tax or home insurance. Which route is better depends on your numbers.
• Your own car: the company can pay you a per-kilometre allowance at the rate the CRA considers reasonable. It is tax-free to you and deductible to the company, and it still needs a log.
• A company car: personal use, commuting included, creates a taxable benefit to you.

Sole proprietor or corporation? →

Questions people ask

Claim what the records support

Both deductions are legitimate and both are worth claiming. What they need is a percentage you can show how you got, and records kept through the year rather than rebuilt at the end of it.

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