Business-Use-of-Home Expenses — Montreal CPA Firm Near You: How to Deduct Home Office Costs, Calculate Percentages, and Stay CRA-Compliant

More Canadians than ever are running businesses, earning self-employment income, or practicing professional activities from home. Whether you are a consultant, freelancer, therapist, contractor, online seller, gig worker, or operate a small professional practice, the CRA allows you to deduct a portion of your home expenses—but only if strict conditions are met.

Business-use-of-home expenses are one of the most valuable deductions available to self-employed individuals. However, they are also one of the most misunderstood. To deduct these expenses properly, you must calculate your home office space correctly, track your usage, understand the limits, and apply the rules in Form T2125.

This guide explains the CRA rules for claiming business-use-of-home expenses, how to calculate the deductible portion, what expenses qualify, how to avoid capital gains traps, and how to carry forward unused amounts correctly.

Legal and Regulatory Framework

The Income Tax Act allows business-use-of-home expenses only if one of these conditions is met:

1. The workspace is your principal place of business, or

2. You use the space exclusively to earn business income and use it regularly and on an ongoing basis to meet clients, customers, or patients.

If neither condition is met, business-use-of-home expenses cannot be claimed.

These rules apply to all self-employed persons filing Form T2125 (Statement of Business or Professional Activities) as part of their T1 tax return.

Expenses are calculated in Part 7 — Calculation of Business-Use-of-Home Expenses. The portion you claim must be based on a fair and reasonable allocation.

Key Court Decisions

Several important court decisions highlight the importance of:

• Correctly allocating workspace area

• Maintaining evidence of business use

• Ensuring exclusive business use when required

• Avoiding claiming losses generated by home office expenses

• Documenting client meetings at home

Courts have consistently supported CRA reassessments when:

• The home office was used primarily for personal purposes

• No logbook, schedule, or client records were kept

• The workspace was not the principal place of business

• The taxpayer attempted to use home office deductions to create a loss

In every case, judges emphasized: business-use-of-home expenses are permitted only when the statutory conditions are fully satisfied and the calculation is reasonable.

Why CRA Targets This Issue

Business-use-of-home expenses are closely reviewed by CRA because:

• Many home offices fail the “principal place of business” test

• Taxpayers often over-allocate space or time

• Personal rooms or shared spaces are incorrectly claimed

• Mortgage interest, utilities, and repairs are commonly overstated

• CCA claims on a home can compromise the principal residence exemption

• Some taxpayers use these expenses to artificially create a business loss

CRA reviews:

• Room dimensions

• Floor plans

• Client appointment records

• Personal vs. business usage

• Consistency between claimed percentages and income levels

• Claims compared to similar businesses in the same industry

Accurate calculations and supporting documents minimize audit risk.

Mackisen Strategy

Mackisen helps self-employed individuals and professionals maximize business-use-of-home deductions while staying compliant. Our approach includes:

• Determining whether the conditions for claiming a home office are met

• Calculating area allocations using CRA-approved methods

• Allocating time-based usage for mixed-use spaces

• Identifying allowable home expenses

• Reviewing CCA implications and avoiding principal residence tax traps

• Ensuring expenses are not deducted elsewhere on Form T2125

• Preparing line 9945 accurately

• Carrying forward unused expenses correctly

Our team creates audit-ready documentation so CRA reviewers can clearly see how the claim was calculated.

Real Client Experience

A self-employed therapist working from home incorrectly claimed her living room as exclusive business space. Mackisen recalculated the correct allocation, preserved legitimate deductions, and avoided a CRA reassessment.

A web developer used a shared room for work only in the evenings. We applied time-based and area-based calculations, resulting in accurate and compliant deductions.

A professional contractor attempted to deduct capital cost allowance on the business-use portion of his home. We explained the capital gains implications and avoided compromising his principal residence exemption.

A gig worker who moved mid-year needed guidance calculating business use across two homes. We prorated each location based on area, time, and number of business hours.

Business-Use-of-Home Conditions Explained

To deduct business-use-of-home expenses, you must meet at least one of these:

Condition A — Principal Place of Business

You conduct most or all of your business operations from home.

Examples:

• Consultants who work entirely at home

• Freelancers or designers working remotely

• Full-time self-employed people with no external office

Condition B — Exclusive and Regular Use for Business

The workspace must be:

• Used only for business, and

• Used regularly and on an ongoing basis to meet clients, customers, or patients

Examples:

• Therapists seeing patients at home

• Accountants meeting clients in their home office

• Hair stylists using a dedicated space exclusively for clients

If the area is mixed personal/business use, Condition B cannot be met—but Condition A may still apply.

What Expenses You Can Deduct

You can deduct a portion of the following:

• Heating

• Electricity

• Home insurance

• Maintenance and cleaning

• Property taxes

• Mortgage interest

• Rent (if you rent your home)

• Internet and utilities (where used for the business portion)

• Capital cost allowance (CCA) — with caution

To determine the deductible portion, use a reasonable basis such as:

(Workspace Area ÷ Total Home Area)

Example:
If your home is 2,000 sq. ft. and your office is 200 sq. ft., your deduction percentage is 10%.

Mixed-Use Rooms: Use Time Allocation

If the workspace is used for both business and personal purposes:

1. Calculate business-use percentage by area, then

2. Multiply by time used for business divided by 24, and further by days used per year

CRA accepts only reasonable time-and-space allocations.

Rental Homes

If you rent your home, you may deduct:

• Rent

• Utilities

• Maintenance

• Insurance (if applicable)

The calculation rules are the same as for homeowners.

Important Restrictions

You cannot create or increase a business loss

Business-use-of-home expenses are limited to:

• Your net business income before deducting these expenses

If expenses exceed income:

• You cannot use them to create a loss

• You may carry them forward to future years as long as the home office conditions continue to be met

Capital Gains Risk

If you deduct CCA on your home:

• You may lose part of your principal residence exemption

• Capital gains and recapture may apply when you sell your home

For most taxpayers, Mackisen recommends not claiming CCA on the home unless the tax advantages significantly outweigh the future consequences.

How to Calculate Business-Use-of-Home Expenses

(Form T2125 — Part 7)

The form requires:

• Total annual home expenses

• Calculated business-use percentage

• Allowable portion

• Carried-forward amounts

• Year-end totals for line 9945

Expenses claimed on line 9945 cannot be claimed elsewhere on Form T2125.

Common Questions

Do I need a separate room?
No. You may use part of a room, but allocation must be reasonable.

Can I claim the kitchen table?
No, unless it is your principal place of business and used exclusively for business (rare).

Can I claim my entire Internet bill?
No. Only the business-use portion.

Can employees claim these expenses?
Only under very specific employment conditions (not covered here; this blog is for self-employed).

Can I claim CCA?
Yes, but doing so may affect your principal residence exemption.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.

If you operate your business from home, Mackisen can calculate your business-use-of-home deduction, prepare Form T2125 correctly, and build audit-ready documentation to protect your tax position.