Working with new small business - they mentioned more than 50% of home exclusively used for business.
Historically, most I’ve seen claimed is 35% for a tradesperson - workshop set up. The last 5 years, I haven’t seen more than 15% claimed with exception of one taxpayer - 24%.
I reviewed 18(12) - taxpayers situation is in agreement
Income Tax Folio S1-F3-C2, Principal ResidenceP 2.59
I don’t believe there were structural changes (will confirm) and no CCA will be claimed. However, over 50% business use is not ancillary.
Clearly taxpayer would want to avoid risking principal residence exception. I feel any trade-off of PRE (capital gain from change of use) from increased % of business use of home expenses would not be worth it.
My thoughts - no more than 1/3 business use of home based on their industry (service-based home business) to avoid issues with the CRA in the future pertaining to the PRE.
Is anyone aware of court precedent on topic/have any comments?
There’s not much court precedent with regards to this matter outside of farmland considerations and other large acreage properties, which go on to elaborate the 1.24 hector rule. I usually advise services clients to no more than 20% max, which in itself is really poking the bear… Make it make sense.
Can you elaborate on this point? I only ask because the taxpayer likely has significant acres (I have to confirm this), however, to be clear the business is not farm-related in any way so I’m assuming this doesn’t change your reply to my original question.
This is quite an in depth topic… but simply, CRA limits the PRE to a 1.24 hector lot. However, he can argue a larger lot size (farmers usually do this by having really long driveways and their house in the middle of the field… if you ever see this, it means the guy has a really good accountant lol). Otherwise, it’s prorated based on FMV/acreage, and a capital gain is triggered.
Which “risk” are you referring to exactly? The risk that CRA questions it, or the risk that your client can’t come up with a convincing enough response, or the risk that your client may lose in tax court (if he decides to take CRA to court)? The last one depends on how good a lawyer he engages, which is often proportional to cost.
Even if you use 10% or 20% it is possible that CRA could question it, or reassess a reduction of the PRE. That is, there is always SOME risk.
Remember, it’s not your call. If the taxpayer wants to claim 50% or more, that’s their decision. You just have to be clear in your discussion and correspondence - that you are not opining there is no risk of affecting the PRE. Then, let them do what they want.
On the other hand, if a client is ASKING my advice, I wouldn’t say 1/3. I would say the risk increases in proportion to the % business use, and anything 10% or less is not likely to be questioned.
Does a taxpayer having more than a 1.24 hector lot with a service-based business all done in-doors (non farming) change anything vs a taxpayer who has less than 1.24 hector lot? I’m thinking no but just checking.
Risk I’m referring to is when substantial % of business use of home is claimed this can lead to a partial change in use putting PRE at risk (some of it lost on portion of home used for business)
At risk of WHAT though? What is the “effect on the PRE” that you want to avoid? $1 of extra tax? The annoyance of a CRA audit? The possibility (even 1% chance) of CRA asking for clarification? The need for your client to go to tax court to prove that CRA interpreted the act incorrectly? The remote possibility that CRA takes legal action against you (the accountant)?
There are many “risks” involved, and there is no specified percentage in the ITA re: using your home for business purposes that disqualifies you for the PRE. It is possible that someone might claim 75% of their home as business use and still qualify for the PRE. I don’t know what that could be, and they would likely have to prove their point in tax court, but that person could still say they are not “putting their PRE at risk” because they are absolutely convinced of the legality of what they are doing.
