Are you a self-employed Canadian looking for tax breaks to claim on your 2024 tax return?
If you’re like many self-employed Canadians, you’ve probably thought about claiming a room in your home (or even several of them) as office space. Home office tax deductions can save you quite a bit of money, because the amount claimed can often be quite substantial. If you have a home that costs you $2,500 a month all-in (mortgage interest + utilities + cable/internet) and one-fifth of the home is office space, that’s $500 per month you can claim on your taxes. This works out to $6,000 per year, and a tax savings of $2,000 if you have a 33% marginal tax rate.
So the home office deduction can be very lucrative. However, it’s also risky. Home office expenses are among those that CRA auditors tend to look at with suspicion, because they are very frequently abused. In this article, I will explore the risks of claiming home office expenses on your 2024 tax return.
Home office deductions often get denied on audit
Home office deductions often get denied by CRA auditors, the reason being many self-employed people claim them willy nilly, when the actual criteria for claiming them are quite stringent. To legitimately claim a home office, you need to use it as your primary and exclusive workplace. If you only spend 10% of your working hours in your home office, or if your home office doubles as a laundry room, you can’t claim it.
What that could mean for your tax return
If you claim home office deductions on your tax return, then get audited, you risk having the expenses denied. If this happens, then you’ll have to pay back whatever “tax savings” you realized by claiming the home office. Let’s imagine that you have a 33% marginal tax rate and claim a $6,000 home office tax deduction for 2024, yielding a $2,000 tax refund. Receiving that $2,000 cheque will feel nice, sure, but if you get audited and have the expense denied, you’ll have to pay the $2,000 back to the CRA. So, don’t get adventurous with home office deductions.
Speaking of real estate…
While we’re on the topic of real estate, there is a type of real estate investment that is eligible for a generous tax break:
Real estate investment trusts (REITs).
These are eligible for the dividend tax credit, which can save you quite a bit of money.
Let’s use Killam Apartment REIT (TSX:KMP.UN) as an example. KMP is a REIT that pays a $0.06 monthly (or $0.72 annual) dividend. So at today’s unit price of $16.66, KMP yields 4.3%. Any dividends you receive from this REIT are eligible for the dividend tax credit.
If you invest $100,000 into KMP.UN, you get about $4,300 per year in dividend income. Here’s the math on that:
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Killam Apartment REIT | $16.66 | 6,002 | $0.06 per month ($0.72 per year) | $360 per month ($4,321 per year) | Monthly |
Now, if you have a 33% marginal tax rate, you pay roughly $1,440 in taxes on $4,321 worth of employment income. But with dividend income, you may have much less due to the dividend tax credit. Here’s how the credit is calculated:
- First, your $4,321 in dividend income is grossed up to $5,963.
- Your taxes on the grossed-up amount (pre-credit) are $1,987.
- The 15% Federal credit is $894.
- A 10% provincial credit is $596.
- Actual taxes owing = $497.
So, thanks to the dividend tax credit, you pay about $1,000 less than you otherwise would. Sweet!