Work from home tax deduction: Simplified vs. Detailed Method – Which is Better?
Introduction
If you are like many other Canadians, you probably worked from home in 2020 due to the COVID-19 pandemic and would like to claim the deduction on your tax return. But there are two different methods to choose from, the Temporary flat rate method (aka Simplified), and the Detailed method.
So, what’s the difference? Which one is better? The answer: Well… that depends.
Eligibility
For the full eligibility criteria, click on the following links to the Government of Canada’s site:
Both methods require that you worked from home in 2020 due to the COVID-19 pandemic for more than 50% of the time for a period of at least four consecutive weeks. Also, that your employer did not reimburse you for any of the expenses that you will be claiming.
The detailed method gets more specific when it comes to the work space that you used while working from home. This is important as it determines how to calculate the total amount of expenses you may claim.
Simplified
The new temporary flat rate method allows you to claim a maximum tax deduction of $400. At $2 per day, this works out to a total of 200 working days. Looking at the calendar, starting at March 16, 2020 (which is when a majority of the lock-downs began), if you were to subtract out all of the weekends, stat holidays, and let’s say one vacation day per month, you end up with about 190 working days.
You would have either had to work from home since the beginning of March, worked the odd weekend or stat, or not take a single vacation day, in order to hit the 200 days. This is also assuming that you never went back into the office once since you began working from home.
Detailed
Using the baseline of March 1, 2020, we would be looking at a maximum of 10 months of possible eligible expenses. Divide the maximum simplified ($400) over the number of months (10 months), and we get $40 per month.
So, the question is: would your monthly eligible expenses be greater than $40?
Eligible Expenses
First, we need to look at what are considered “eligible expenses.” For the purpose of this comparison, we will only be looking at what employees earning a salary may claim, as this is more limited than what commission employees may claim. Both salaried and commission employees can claim a portion of the following expenses:
Work-space-in-the-home expenses:
Electricity
Heat
Water
Home internet access fees (not including fees related to the lease of a modem/router)
Maintenance
Rent
Supplies: only materials used directly for work such as stationery items, stamps, toner, ink cartridges, etc.
For more information on what is – and what isn’t – an eligible expense, please click here.
Most important of this list would be the fact that rent paid for a house or apartment where you live may be claimed; however, neither the principal or interest portion of mortgage payments may be claimed.
Work Space
Next, you need to determine what portion of the eligible expenses you may claim is; and to do that, you need to determine what your work space use is. There are two main factors that you need to consider:
Size of your work space:
Calculate your work space as a percentage of your home by dividing the size of your work space by the size of all finished areas in your home. For example, if you use a spare bedroom that is 10 feet by 10 feet, the size is 100 square feet. If the home has a total of 1,000 square feet, then your work space as a % of your home is 10%.
Type or use of work space:
Designated room – used only for work
Common or shared area – used for other purposes besides work
If you have a designated room, then it does not matter how many hours you use the space for work. Therefore, you would claim 100% of the work space.
However, if you have a desk set up in your master bedroom, or are working on the kitchen table, you would need to calculate what percentage of time you may claim for the work space. For example, if you worked 40 hours per week at your kitchen table, dividing this by 168 total hours in a week gives a percentage of 23.8%. If the dining room makes up 10% of your total home’s square footage, then the percentage of home that is used as a work space is about 2.4% (23.8%*10%).
As you can see from the above examples, both the size and use of your work space will affect how much you can claim when using the detailed method. Using a larger space relative to the overall size of your home, or having a designated space to work in, will definitely result in bigger percentage to use when calculating what portion of the eligible expenses to claim.
Doing the Math
Once you have determined your total eligible expenses and work space percentage, it is as simple as multiplying the two together to arrive at your total amount to claim. Again, the question is: would your monthly eligible expenses be greater than $40?
Scenario 1 – If you own your home, and have eligible expenses of $500
o Designated work space: 10% x $500 = $50
o Common area: 2.4% x $500 = $12
As you can see, based on the work space and eligible expenses, in this scenario you would need a designated work space before using the detailed method would make sense.
Scenario 2 – If you rent, and have total eligible expenses of $1,200 (including rent)
o Designated work space: 10% x $1,200 = $120
o Common area: 2.4% x $1,200 = $28.80
Again, it looks like having a designated work space is required to break the $40 in order for the detailed method to be worthwhile, but we should look at this a little further (see Scenario 3 below).
Scenario 3 – Same as Scenario 2, but the Common area is twice as big (20% of total home)
o Common area: 4.8% x $1,200 = $57.60
Let’s face it, if you are only paying $1,200 all-in for rent, electricity, heat, water, and internet, then you are likely to be renting a smaller place; as a result, the common area is likely to be a larger portion of the entire space. In which case, even using a common area as your work space could mean that your claim would be higher using the detailed method.
So, it would appear as though renting your home and/or having a designated work space are key factors in determining which method will result in the larger claim.
However, the above examples are assuming that you worked full-time, and that you did so from your home for the remainder of 2020, without returning to the office. But what if that was not the case for you?
Alternating Schedules
The primary benefit of the simplified method (besides being simple, of course) is if you alternated between working from home and the office. Once you met the eligibility criteria by working more than 50% of the time from home for a period of at least four consecutive weeks, then you can claim those days plus any additional days you worked from home due to the pandemic. Even if you went back in to the office for more than 50% of the time, the days that you did work from home can still be claimed.
Whereas the detailed method requires that you continue to work from home more than 50% of the time in order to claim any expenses incurred during that time-frame. That being said, if you were still working from home more than 50% of the time, then the detailed method may still be more beneficial. This is because every day that you did work at the office is $2 less that you may claim using the simplified method.
Part-Time Employees
When it comes to part-time employees, there is no difference in the eligibility criteria under either method. However, working part-time will affect how much you may claim for both methods.
Since the simplified method is $2 per day worked from home, it is not likely that you will reach the maximum claim of $400 (unless you still work 5 days per week, but only 3 or 4 hours per day). However, if you only worked 3 days per week, then your monthly eligible expenses would only need to be greater than approx. $24 - 28 in order for the detailed method to result in a higher claim.
As for the detailed method, the largest factor affected by only working part-time would be the number of hours worked when determining what percentage of your home is used as a work space for a common area.
Conclusion
In conclusion, the answer to the question about which method is better is that it really depends. For a more definitive answer, perhaps you need to consider the following questions first:
Do you rent your home?
Do you have a designated work space?
If the answer to either of these questions is “yes,” then it seems like there is a good chance that the detailed method would be a better choice for you.
Of course, everyone’s situation is different, and as you can see, your individual circumstances will have a big impact on the outcome. So, it is important to review the rules carefully and consult with a tax professional if you are uncertain.