Technology has undoubtedly powered the work-from-home revolution, but if employees paid to upgrade their virtual office setups, they shouldn’t expect a tax break on their tech investments.
Despite drastic changes in where and how Canadians work, COVID-19 has not drastically changed eligible expenses under Canada’s tax system.
“Historically, employees that were eligible to claim expenses were not allowed to claim what they call capital costs – they weren’t able to claim deductions based on assets,” said Anthony Jay, tax manager at Grant Thornton LLP.
“I think when they expanded those rules for COVID, they kind of kept that restriction to not allow employees to claim capital assets.”
That means that what constitutes an eligible expense might feel out of touch with the reality of working from home during the pandemic. While employees can claim pencils, envelopes and stamps, they can’t claim software, a USB drive, a webcam or a desk.
According to Jay, employees can claim operating but not capital expenses; they can deduct the toner, but not the printer, and he said that is unlikely to change.
Within this framework, employees do have options. They can ask their employer to buy an asset – such as a laptop – that remains the property of the employer. They can also ask their employer to reimburse them for a purchase that they intend to keep. The first $500 in reimbursements for home office equipment won’t be included as taxable benefits by the Canada Revenue Agency (CRA).
“So they are giving employees a bit of a break there,” said Jay, adding that any benefit above the $500 threshold will be considered employment income.
Individuals have two ways of calculating and claiming home office expenses for 2020. New this year is the CRA’s temporary flat rate method, which entitles Canadians who worked from home more than 50% of the time for at least four consecutive weeks last year to claim $2 a day for up to 200 days.
Workers whose home expenses exceed $400 can claim those costs the traditional way, which requires a signed T2200S form from an employer.
As tax time approaches, filers will also need to consider any government benefits received during the last year. The Canada Emergency Response Benefit, for example, is considered taxable income and – unlike employment income – is not subject to automatic tax deductions.
Despite Ottawa’s efforts to clarify that such COVID-related benefits will be taxed, KPMG tax partner Shane Onufrechuk expects some Canadians will be caught off-guard when they look at their 2020 tax bill.
Spouses may want to consider taking advantage of historically low interest rates to offset high income tax rates.
A higher-income spouse can loan a lower-income spouse funds at the CRA’s prescribed interest rate. Investment income on those funds is taxable at the marginal tax rate of the lower-income spouse, which can help reduce a family’s overall tax bill.
The prescribed interest rate for such loans has fallen to 1% from 2%, and, according to BDO’s Western Canada tax service leader Bruce Sprague, this common tax planning strategy takes on new importance with such a low prescribed rate.
“I mean, it’s never going to go lower than 1[%],” he said.
–With files from Albert van Santvoort