Business use of home - Repairs/maintenance

Tax Topics
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I have a client running a business in her home. She does see clients there. She refinanced her home and has done some rather large reno items. She wants to call them repairs and maintenance expenses. I’d like to hear what others would do with this situation. Items include:

Re-roofing (same type shingles) ($8k).

Addition of solar panels (her argument being the business is benefiting from the reduced electric bills). ($10k after grant returns)

New windows ($10k) Done because one of them was leaking and several others showed signs of similar issues. (I’m thinking perhaps the windows in the office and living room where clients come and go. Maybe the bathroom window too) Again, arguing the business is benefiting from the increased efficiency on a repair that had to be done so a portion should qualify as an expense.

Repainting rooms because the window installation created cracks and large chips in the paint around the windows.

Would you use any of these? CCA? I’ve been reading up, but am just not clear. If it is CCA, how do I get that on the home portion and not part 4?

ETA: We’re in Manitoba if makes a difference.

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And I want to call them attempted tax fraud…
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Perhaps she wants to deduct her cat food (office pest control) and dog food (office alarm system) also…?
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Maybe she is using Aladdin’s magic lamp version of the Income Tax Act? - Get her to show you where in the Act she would like to deduct them…

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Hi, @Stargazer, I’m in Manitoba too (Winnipeg), not that it makes any difference to answering the question. But yes, beautiful view of the stars here in the prairie provinces.

The majority of the home renos your client made are capital in nature and applied to the adjusted cost base of the home. The portion of the capital expenses specific to the business area of the home would be used when the home is sold to reduce any capital gains on the business portion of the home. However since the business portion is usually less than 50% of the home, the entire property qualifies for the principal residence exemption and thus no capital gain on sale of the home will be assessed. If the Business Use of Homes was greater than 50%, then the Principal Residence Exemption wouldn’t apply to that portion of the property and a change of use would have occurred on that section. Something to be aware if a client asks you to claim more than 50% of their home for Business Use of Homes.

So the bulk of the items your client wants to claim should not be capitalized on the T2125 (windows, roofing, solar panels, etc).

Business Use of Homes expenses that would qualify for Repairs & Maintenance are typically low expense items where the expense is specific to the area used by the business and not used in any other section of the house. Paint purchased to paint the office walls would qualify if the paint was ONLY purchased for that space and not for other areas of the home (painting wouldn’t be considered capital in nature but a maintenance cost).

The other interesting thing is that TaxCycle includes a CCA section for Business Use of Homes (Line 7K which I’ve only just noticed now for the 1st time), however, this line is not hyperlinked to any CCA location that I can find to enter the CCA data. I don’t know where in TaxCycle you would enter it so that it populates on Line 7K, as the default location for all T2125 CCA is Line 9936. Seems you would have to override Line 7K if you wanted to manually add CCA to Business Use of Homes.
@Cameron, did I just find a glitch in TaxCycle or is TaxCycle designed this way to prevent us from claiming Business Use of Homes CCA?

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You and your client should read Income Tax Folio S4-F2-C2 (Business Use of Home Expenses). You’ll be better equipped to advise your client (and other clients). Primarily, capital additions to your home are not allowable deductions for the business use of home expense (if the gain on your house is tax-free with the PRE, it just makes sense that CRA doesn’t allow you to deduct capital improvements to your house). You don’t have to go very far past that in just saying ‘no’ to your client. Read paragraph 2.28 of the Folio to answer the roofing question.

We all get these questions during tax season. Knowing the basic rules will minimize the time you waste considering these ideas.

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Improvement vs repair: My understanding, based on 50 years experience and discussion over audits is as follows. Capitalize if the item was not there before. Expenses as long as it replaces what was there with like materials except in the case where the previous material is no longer available or would be more expensive than with new materials. ie vinyl windows are less expensive than new wood windows and can be expensed. I did have a case where the person reshingled the roof and added dormers. I chuckle at the inquiry I wrote to Revenue Canada explaining that a taxpayer with a leaking roof on his rental unit, had repaired his roof three times over the years by putting on a new roof without removing the old one. This time he wanted to do it properly by removing the old roofs first. I asked them if he had to put on three roves in order to follow their guidelines. Their reply - they sent me a copy of their tax guide, nothing else.

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I would (almost) never apply any CCA on Business Use of Home. CCA recovered when home is sold as well as loss of Principal Residence on any portion of home claimed are ample reasons not to do it. Your client definitely is trying to over do it, so listen to @joe.justjoe1 and avoid trouble for both you and your client. One of my clients is experiencing great difficulty because a previous tax preparer had gone beyond what was reasonable. When the CRA started looking, the preparer bailed and recommended they come to me. To my regret, I only found out later what had actually taken place.

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Are the living room and bathroom used all or substantially all for business, (at 80%). If not, expenses for those areas are off side.

I started at the kitchen table when moonlighting decades ago so NO business use of home expenses. I now have a work office and an office to meet clients, and I claim business use of home expenses.

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Not fraud, just an impermissible claim.

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This is pretty much spot on.

Repairs such as replacing a door or a lock, fixing a floor to make it safe for clients (NOT the owner). Tax Folio S4-F2-C2 is a pretty good guide. ZERO capital outlays for items that are attached to the property.

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Thank you all! She isn’t trying to commit fraud. She’s trying to maximize her return. She “read up” online, which is as bad as it is good depending on how good you are at seeing information that doesn’t back up your bias. I suspect that isn’t her strong suit.

I get very flustered in “yeah but” conversations when trying to explain things when the yeah buts keep coming. I get flustered in conversations period to be honest. I do not have the gift of gab :laughing:. I understood that this couldn’t happen; I needed a fresh approach to wording it because she wasn’t getting it the way I was explaining it.

I can’t tell you how much I appreciate this community, it’s wealth of knowledge, and willingness to help even when we are all so busy.

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Yeah, exactly. I deal with clients like this all the time. It’s so bad with some people that I’ve actually pulled a Folio or the Tax Act to show them.

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There are a couple of things you CAN do, though, during these conversations to alleviate stress (to you…the client is on their own!) and which all of us long in the tax biz have learned:

  • be confident in your knowledge; YOU are the one who has actually studied tax (I assume!) and has actually READ the relevant portions of the Income Tax Act. I used to have a copy on hand in the early days of my practice and I’d hand it to them and say…“Please show me where it says you can claim {whatever}, because I can show you where it says you cannot do so.”
  • remind them that they came to YOU for advice, as a professional. Do they argue with their lawyer? Physician? Architect? and tell them how to do their work…

Every client has an “uncle” who is a tax expert and got away with all kinds of things. I have, more than once, told them to take their files and get their “uncle” to do their taxes then.

I don’t need to do that any more. :slight_smile:
It comes under the heading of “managing expectations”.

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The communication with your clients is very important. It’s a VERY busy time of year and unfortunately, some clients want you to educate them about their tax return. I don’t have time for that in March/April so I give them general answers most of the time, such as “you can only deduct the operating expenses related to the home office”.

Your confidence will grow as you experience new situations. Just don’t let clients push you around too much. You can always say “I’ll get back to you on that” if you don’t know the answer.

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I see a few people who quote what I call “beer parlour law”.Only once.

From “SmallBizGuy via protaxcommunity.com” <notifications@taxcycle.discoursemail.com>
To neal@nealnicholson.ca
Date 2023-04-15 10:44:48 AM
Subject [protaxcommunity.com] [Tax Topics] Business use of home - Repairs/maintenance

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Thanks @SmallBizGuy I really needed to hear this. I am confident in my ability to do things right or I wouldn’t be working for myself.

I’ve come up in a “customer is always right even when they are wrong and do what you have to do to diffuse it” world. Now that I’m in a customer isn’t always right situation and I have to convince them of things I know to be true, I struggle with being confident in the conversations.

It doesn’t help that I went on my own in February 2020. Most of my interaction with clients has been done remotely, so I haven’t had to explain things in real time. I had all the time in the world to explain things and link them to specific codes in email.

I will definitely take your and @johanus advice and print out a hard copy of the code. That will make it easier for me to make the case on the fly when my own anxiety makes it sound like I don’t know what I’m doing at all.

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Beautifully said @SmallBizGuy.
It is our responsibility to provide guidance to our clients on what they can legally claim and what they can’t. With the digital age, there a ton of garbage blogs that provide misinformation to tax payers and when they read that, they all of a sudden think they know more than a professional.

On my office wall, I have a sign up my office that reads:
“We offer three types of services: fast, good, and cheap.
But you can only pick two
Fast and good won’t be cheap.
Good and cheap won’t be fast.
Cheap and fast won’t be good.”

Btw, does the CRA provide a copy of the Canadian income tax act, I’d love to get myself a copy of it.

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CRA does not provide copies of the Act. However, Justice Canada keeps all legal Acts online: https://laws-lois.justice.gc.ca/eng/acts/i-3.3/

It’s usually easier to order from one of the publishing companies that does the updates each year, as those also include annotations and are often easier to search through.

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“She refinanced her home and has done some rather large reno items. She wants to call them repairs and maintenance expenses.”
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In the real Act (not the Aladdin’s magic lamp version), the following appears:
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"S 239 (1) Every person who has
(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, …
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or
(g) both the fine described in paragraph 239(1)(f) and imprisonment for a term not exceeding 2 years.

(1.1) Every person who obtains or claims a refund or credit under this Act to which the person or any other person is not entitled or obtains or claims a refund or credit under this Act in an amount that is greater than the amount to which the person or other person is entitled
(a) by making, or participating in, assenting to or acquiescing in the making of, a false or deceptive statement in a return, certificate, statement or answer filed or made under this Act or a regulation, …
is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(g) a fine of not less than 50% and not more than 200% of the amount by which the amount of the refund or credit obtained or claimed exceeds the amount, if any, of the refund or credit to which the person or other person, as the case may be, is entitled, or
(h) both the fine described in paragraph 239(1.1)(g) and imprisonment for a term not exceeding 2 years.

(2) Every person who is charged with an offence described in subsection 239(1) or 239(1.1) may, at the election of the Attorney General of Canada, be prosecuted on indictment and, if convicted, is, in addition to any penalty otherwise provided, liable to
o (a) a fine of not less than 100% and not more than 200% of
(i) where the offence is described in subsection 239(1), the amount of the tax that was sought to be evaded, and
(ii) where the offence is described in subsection 239(1.1), the amount by which the amount of the refund or credit obtained or claimed exceeds the amount, if any, of the refund or credit to which the person or other person, as the case may be, is entitled; and
(b) imprisonment for a term not exceeding 5 years."

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To be fair, Joe…most claims of this nature are not dealt with via Sec 239, but typically via reassessment and a Sec163(2) penalty as may be warranted.

Sec 239 is typically only used in criminal circumstances, and Sec 163(2) penalties applied for non-criminal ones. That distinction, while not stated in the act, tends to be a procedural one, but the SCC has commented (albeit lightly) on it in Guindon, Wigglesworth and Martineau, among others.

In general, ordinary taxpayers do not face prosecution under Sec 239(1) or related areas for misapplication of tax law, but they do where the transactions are knowingly abusive and/or demonstrably fraudulent. (Cash income, faked receipts or expenses etc. are easily distinguished).

Misclaiming of ordinary expenses tends to be dealt with under Sec 163(2).

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“where the transactions are knowingly abusive and/or demonstrably fraudulent.”

Likely you are mostly referring to where the legal proceedings are pursuant to S239(1)((d) or (e) or S239(1.1)(e) or (f).

However, there appears to be nothing preventing CRA from proceeding pursuant to the quoted S239(1)(a) or S239(1.1)(a) if they so wished.

Whether CRA need or choose to do so frequently or infrequently now or in the future is rolling the dice from the perspective of the risk an offender chooses to take upon choosing to take actions not sanctioned by the Act.

The CRA has the “hammer” at their disposal…

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