CRA Announces New Simplified Process for Claiming Work From Home Expenses and Formalizes the Tax Treatment of Certain Employer Provided Employee Benefits During the COVID-19 Pandemic
On December 15, the Canada Revenue Agency (the "CRA") released additional details regarding the availability of employee deductions for work from home expenses and the taxation of certain employer provided employee benefits during the COVID-19 pandemic.
These new rules are a welcome relief and provide clarity for many employers and employees already grappling with a tough 2020 due to the pandemic. There were many questions and concerns as to how the existing employee home office expense deduction rules would work in 2020 with many employees (nearly all in some industries) working from home. For example, there was some uncertainty as to how to apply the condition that an employee be required to work principally from home in order to claim the home office deduction. Furthermore, from the employer's perspective, the requirement to complete Form T2200 for a significant number of its employees working from home seemed unnecessarily onerous.
Similarly, the social distancing and other health measures put in place by the public health authorities meant that normal commuting and work routines were disrupted. In order to address these concerns, the CRA provided some additional relief with respect to the taxation of certain employee benefits during the COVID-19 pandemic in order to mitigate some of the extra costs associated with traveling to work safely.
Deducting Home Office Expenses
Employees will generally be able to claim a home office expense deduction if they worked from home in 2020 due to the COVID-19 pandemic (or were required by the employer to work from home) and, specifically, worked more than 50 per cent of the time from home for a period of at least four consecutive weeks in 2020.
For 2020, employees can generally choose between two methods to deduct work from home expenses: (i) a newly introduced temporary flat rate method; or (ii) the detailed method which requires the completion of either a T2200 or a T2200S by the employer.
Temporary Flat Rate Method
To be eligible for the flat rate method, an employee must have worked more than 50% of the time from their home for a period of at least four consecutive weeks due to the COVID-19 pandemic. An eligible employee can claim a deduction of $2 per day for each day worked from home in that period, plus any additional days worked from home in 2020 due to the COVID-19 pandemic. The flat rate method allows for a maximum deduction of $400 (i.e. 200 days).
The flat rate method is currently only available for 2020. It is simpler than the detailed method requiring neither a calculation of the size of a home work space nor supporting documents (for example). The employee can use this method only to claim home office expenses and not any other employment expenses. The employee will still be eligible for the flat rate method if the employer reimburses the employee for some, but not all, of their home office expenses.
The employee claims expenses under this method by selecting "Option 1" in Form T777S and including the form with the employee's tax return.
An employee whose work from home expenses exceed the $400 flat rate may decide to use the detailed method. The detailed method requires that an employer complete either a T2200 or a new simplified form, the T2200S, and that the employee complete a Form T777 or T777S. To assist with this process the CRA has announced that it will accept electronic signatures on the T2200 and T2200S.
The T2200S is shorter than the T2200 and is only for employees that worked from home due to the COVID-19 pandemic. An employer will only have to confirm whether the individual worked at home due to the pandemic, whether they were reimbursed for home office costs and whether those costs are reported on the employee's T4.
The CRA has provided a list of eligible expenses. Salaried and commission employees can claim a percentage of electricity, heat, water, the utilities portion (electricity, heat, water) of condominium fees, home internet access fees, maintenance and minor repair costs and rent. Commissioned employees can also claim a percentage of home insurance, property taxes and amounts paid for the lease of a cell phone, computer, laptop, tablet, or fax machine, to the extent that the expenses reasonably relate to earning the commission income. In keeping with past practices, ineligible expenses for all employees include mortgage interest, principal mortgage payments, home internet connection fees, furniture, capital expenses and wall decorations.
There are several limitations on the work from home expenses that can be claimed under the detailed method. In particular, (i) where an employee only worked at home for part of the year, expenses can only be claimed for periods in which the employee worked from home; (ii) where an employee had multiple income sources, expenses can only be claimed from the income that the expenses related to; and (iii) expenses can only be claimed for an amount up to the amount of income earned, and not in excess of such amount. If an employee has expenses in excess of their income, the expenses can be carried forward to the next year, provided that the employee earns income from the same employer in the next year.
The employee claims expenses under the detailed method by selecting "Option 2" in Form T777S if the employee is claiming the actual amount paid as a result of working from home and are not claiming any other employment expenses or by using Form T777 if the employee is required to work from home or if working from home due to the COVID-19 pandemic and claiming additional employment expenses. Both the Form T777S and T777 must be filed with the employee's tax return. Supporting documentation and the completed T2200S or T2200 form must be retained by the employee.
Employer Provided Benefits and Allowances
The CRA also formalized previously announced positions with respect to the taxation of certain commuting and home office costs. According to the CRA, these positions are effective from March 15 to December 31, 2020.
Commuting Costs and Parking
Allowances, reimbursements, and payments for commuting costs and parking expenses generally constitute taxable benefits for an employee. The employee must normally include the value of such benefits in his/her income and the employer must take the benefits into account for purposes of calculating payroll deductions.
However, in light of the COVID-19 pandemic, the CRA has adopted the following positions with respect to the taxation of employee commuting and parking benefits:
- Working at the Office: The CRA will not consider an employee to have received a taxable benefit if: (i) the employee continues to work from their regular place of employment during the pandemic; (ii) the employer pays for, reimburses, or provides a reasonable allowance for commuting costs incurred by the employee during the pandemic; and (iii) the costs are over and above the employee's normal commuting costs. This position applies to the use of employer-provided motor vehicles (assuming the employee did not normally commute to work using such a vehicle before the pandemic).
- Working from Home: The CRA will not consider an employee to have received a taxable benefit if: (i) the employee works from home because the employee's regular place of employment is closed; and (ii) the employer pays for, reimburses, or provides a reasonable allowance for normal or additional commuting costs incurred by the employee to travel to the employee's regular place of employment for any purpose that enables the employee to perform their employment duties from home. For example, an employee may travel to the office to pick up certain office equipment. The CRA will also not consider an employee's use of an employer-provided parking spot, at his/her closed place of employment, to constitute a taxable benefit.
An employer must maintain appropriate records demonstrating the reasonableness of any allowances in relation to commuting costs. If an employee uses an employer-provided vehicle, the employee should maintain records indicating the number of kilometres travelled by the employee between his/her home and regular place of employment.
Home Office Equipment
If an employer provides an employee with home office equipment or an allowance or reimbursement for home office equipment, the employee may realize a taxable benefit. The employee must include the value of such benefit in his/her taxable income. The employer must take the benefit into account for payroll deduction purposes.
However, in light of the COVID-19 pandemic, the CRA has provided an administrative concession with respect to such benefits. The CRA will not consider an employee to have received a taxable benefit if the employer pays for or reimburses up to $500 of computer or home office equipment to enable the employee to carry out their employment duties. The employee must submit receipts for the computer/home office equipment to the employer.
The $500 limit is an aggregate limit per employee. The $500 limit does not apply separately to each purchase of a computer or home office equipment. For example, if an employer reimburses an employee for three pieces of computer or home office equipment with an aggregate value of $750, the employee will realize a taxable benefit equal to $250 (being $750 minus $500). The $500 limit does not apply to each piece of equipment.
The CRA also noted that, under its existing policy, an employer may pay for or reimburse the cost of an employee's cell phone service plan or home internet service and such payment or reimbursement will not constitute a taxable benefit to the extent that the employee uses the plan or service to carry out his/her employment duties.
If an employer provides meals to an employee working at his/her regular place of employment during regular work hours (or provides reimbursement or an allowance for such meals), the employee will generally realize a taxable benefit. The CRA did not provide an updated position with respect to the taxation of meal costs for employees. However, the CRA noted that an employee may not realize a taxable benefit for overtime meals or allowances or subsidized meals under certain circumstances as set out under existing CRA policies.
The CRA's announcements should provide some relief to employers, especially large employers, with respect to their obligations to the file T2200s for their employees and the payroll deduction and remittance obligations with respect to the extra commuting and home office expenses provided to employees as a result of the COVID-19 pandemic. Nonetheless, there remains some complexity as employers will have to decide on a policy with respect to issuing T2200S to its employees as it may not be immediately apparent which employees will rely on the temporary flat rate method or the detailed method.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.