Business use of home - creating a loss

Hi,

I have a shareholder (sole shareholder) who uses her home office to run her business. The business use of home expense (reimbursement to her from her corp) puts her corp in a loss position.

For personal tax purposes, sole props have to carry forward any business use of home expenses that put their income in a loss position (reduced to zero, with the balance carried forward).

What is the best practice when it comes to a corporation where the rent reimbursement puts them in a loss position? Do you create a reserve for this and add it back on schedule 1 and deduct it when there is sufficient income in the corp?

Thank you!

You can set it up as a prepaid expense. That is a slight deviation in accounting practice, but it’s an easy way to track it.
Alternativley, add it back on Sch 1 and create a schedule for your records to claim it in the future.
Is it “Material” as I’ve seen many just write it off on the company side .
I’ve also seen some report the expenses on the T1 under a rent T776 and report $50 of income from “renting” to the company. ie the % of expenses plus $50 is the rent income. The CRA might look more favorably on this if you write off the full amount and create a loss on the T2. The taxpayer has reported the income and the company the loss, but overall a $50 profit. A reasonable auditor would let it go.

Assuming it is a bona fide home office allocation (i.e. calculation based on actual space pro-rated over total home), you can let the expense create a loss in the corp. In most cases such a home office expense is not a significant amount to the overall P&L. Let the loss carry forward on Schedule 4 and utilize it in future period. You could also do loss carryback (depends on the amount) also. I have found as of late, anytime the CRA has to “refund” money, it comes with an element of examination scrutiny.

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Paragraph 18(12(b) only applies to individuals.

Which GIFI code on the Schedule 125 would you be using for Business use of Home expenses.

As this is a corporation, it will be on the T2 GIFI as part of the rent expenses. Shaun, earlier stated how this is handled, and that is what works best. I’ve had CRA examine this a couple of times and they had no issue with it. It must be legitimate and handled as Shaun explained!

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I have always been concern with home office expense, especially with a corporation because the % used seem to be high all the time and business owners always try to justify their %, but not up to us to decide, I told them the consequences, and worse. Possibly shareholder benefit for the unreasonable amount?

I suggest to charge a reasonable amount of rent to the corporation for the use of home, and then claim the expenses on T1, even if CRA questions later, it won’t affect both T1 and T2

Thank you for this information.

“I have a shareholder (sole shareholder) who uses her home office to run her business.”

Shareholders do NOT run a business.
Shareholders might be earning investment income (dividends).
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"The business use of home expense "

What “business use of home expenses”?
As noted, the SHAREHOLDER is not operating a business.
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Perhaps we may assume that what you meant to say was that an employee of the company (a director), in addition to working as employee for the corporation, also RENTS OUT space to the Corporation, and earns rental income from that.
In such a situation, care should be taken in setting up the rental contract, as it would appear to be a non-arms-length transaction.

Alternatively, perhaps you meant to be speaking about T2200/T777 employment expenses reimbursement?
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From the payor’s (Corporation’s) side, what expenses they may incur/pay are detailed in the various contracts.
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Since the post is phrased in the past tense, perhaps both the individual and the corporation have already been making payments/receipts which do not agree with either the contracts or the ITA. It is probably necessary to trace back and attempt to rectify.


jeffliu wrote:

I have always been concern with home office expense, especially with a corporation because the % used seem to be high all the time and business owners always try to justify their %, but not up to us to decide,

Has anyone seen the CRA come back at a business owner when they sell their home and claim the personal residence exemption for the entire capital gain? (Even though they’ve been claiming 15% of it as a business expense?) I haven’t come across this yet, but I’m concerned they might on the higher percentage claims.

Usually, I would claim only expenses, not capital items so claiming home office would not affect sale of property.

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@sjrpetersen
I haven’t had any of MY clients experience that, but I have heard of court cases where the taxpayer was required to report SOME capital gain, when the business or rental portion of the home was 50% or more. Haven’t heard if CRA ever pursued it when the business or rental portion was 15% or less. Might be a good question for Video Tax News…they seem to keep track of interesting facts like that.

This is only if they are claiming CCA on the rental portion of the property. It’s usually not worth doing that, simply because of the clawback when the home sells. It’s such a small portion, they are usually better of not claiming.

@johanus
That is not correct. Even if you don’t claim CCA, the business use of a personal residence affects the ability to claim the PRE:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/sale-your-principal-residence.html

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html

It may be more difficult for CRA to CATCH that fact without you having claimed CCA, but it does happen.

I guess you need to read the whole thing:

" The CRA will consider the entire property to maintain its nature as a principal residence in spite of the fact that you have used it for income producing purposes when all of the following conditions are met:

  • The income producing use is ancillary to the main use of the property as a residence.
  • There is no structural change to the property.
  • No capital cost allowance is claimed on the property."

I did state that “No capital cost allowance is claimed”. The other items are given in earlier discussion…

Therefore, I am correct. And, yes, I’ve dealt with CRA on this directly multiple times. I’ve never had an issue with any of my clients.

@johanus
Note the bold word “all”. That means, even if no CCA is taken, the first bullet point can cause you to lose some of the PRE, if the business/rental portion is more than “ancillary” (which 50% or more is likely to be).

Perhaps I misunderstood your initial comment - were you saying that CRA “WILL DEFINITELY” pursue reduction of the PRE when CCA is claimed, even if the business/rental portion is LESS than 15%? If so, I agree :grinning:

Exactly. We are now in agreement.

Your answer was useful for me too
Thanks

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