Trisha asked:

I'm a full time freelance writer, and author of 6 books. I cannot find an accountant who can tell me what can I deduct from my home office? Beside the rent and telephone what else can I deduct from my taxes?

CO Staff answered:

To help you we had Christine Hernden, a staff researcher, answer your question.

For starters, you can access a detailed list of what can be used as an expense from the Canada Revenue Agency website at http://www.cra-arc.gc.ca/tax/business/topics/solepartner/businessexpenses/menu-e.html

This is a useful resource as it explains restrictions by expense category. Most business expenses can be fully deducted, but there are a few categories with unusual restrictions. For example, you can only deduct 100% of advertising expenses if a) it is directed at a Canadian market and b) if 80% or more of the non-advertising content in the publication is original content. If you advertise to a Canadian audience with a foreign broadcaster you cannot deduct the expense at all.

To gain a more detailed insight into the answer your question we spoke with Evelyn Jacks, the author of Make Sure It's Deductible. Here is what she told us.

CO: First of all, what is an expense?

EJ: An expense is an outlay of dollars or an in-kind item. Paying for them will help you make a profit. To put it another way, expenditures that relate to the earning of income in a business will generally be deductible if there is a reasonable expectation of profit in the enterprise.

CO: Are all expenses equal?

EJ: Expenditures generally fall into two categories.

First are those that are used up in the course of earning income from a business. Those are usually known as "current expenditures". They have to match to income or the potential for income. They are generally 100% deductible, although certain expenditures are restricted such as meal and entertainment costs wherein you can only claim 50% of the expenditures.

The 2nd group of expenditures is "capital" in nature. They are for the acquisition of income producing assets used in your business, such as cars, furniture, computers, and building(s).

Those expenditures, for tax purposes, are subject to the capital cost allowance, which provides for deduction based on a percentage of cost on declining balance basis.

[Editor's note: for a more detailed explanation of capital expenses see our article, Accounting 101:Balance Sheet Basics]

CO: The question we received was from a full time freelance writer and author. What can she deduct from her home office besides rent and telephone expenses?

EJ: Ok, my book, Make sure it's deductible has a whole chapter on this subject.

Essentially it depends on the "status of employment", whether you are employed, self employed or working on commission and the expenditures break down similarly to how the first question on whether or not current they are current or capital expenditures.

Lastly, the home office itself is going to be the percentage of expenditures that you can claim on the full home will be based on the square footage of the home, bottom number and top number is the square footage of the home office. That ratio is used to prorate all the expenditures such as mortgage interest, utilities, cleaning costs and so on. All depend on the "employment status".

An entire chapter in the book explains all the criteria in simple English.

CO: Is your car an expense?

EJ: It can be. Again when you go back to the original criteria for expenditure and therefore your first question is appropriate. If the car is used to earn income for a business or from an office of employment with reasonable expectation of profit the car will be deductible.

We need to understand the "employment status" of the taxpayer. The rules vary slightly in each situation.

The primary rule is that you have to keep a distance log and record both personal and business driving because you will have your total expenditures for the vehicle prorated the amount driving for business or office and employment over total distance driven in the whole year. That ratio is going to be used to prorate your current expenditures and your fixed costs that you're saying are the capital costs on your car or in the case of a leased vehicle, your leasing costs, your interest costs and so on.

So again, there is a whole chapter in my book that applies for each group of taxpayers.

About the Evelyn Jacks
The third edition of Evelyn Jack's book, Make Sure It's Deductible, was published on Nov. 27, 2006 has been completely updated for the latest tax information based on the May 2nd budget and a lot of tax changes for small business owners and employees. Her book can be found in your favourite bookstore or online on her website at www.knowledgebureau.com. Knowledge Bureau a post secondary educator to the tax and financial services industry.

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