The 2020 tax year is coming to an end, and you don’t want to get a nasty surprise of a high tax bill in April 2021. It is time you start learning about the various tax breaks the Canada Revenue Agency (CRA) offers. With millions of Canadians working from home as a result of the COVID-19 pandemic, you can leverage the CRA’s workspace-in-the-home tax break.
Data from Statistics Canada revealed that five million people worked mostly from home in April 2020, when the pandemic hit its peak. This work-from-home culture increased expenses such as electricity, heating, stationery, and maintenance. If you also brought work home, grab this opportunity and another tax break to your list.
How does workspace-in-the-home tax break work?
You can claim a tax break on the additional expenses that you have paid to operate a workspace from home. These are the expenses you incurred as a result of the pandemic-driven lockdown. If you get a reimbursement for these additional expenses from your employer, you are not eligible for the workspace-in-the-home tax break.
You can apply for this tax break if you meet one of the following two conditions:
- If you spend more than 50% of the time working from home.
- If you use the home-workspace only for work and to regularly meet clients, customers, and other work-related people.
Your employer needs to fill and sign a T2200 form for every employee that it has asked to work from home. You should keep a signed copy of the form to show to the CRA.
Which workspace-in-the-home expenses can you deduct from 2020 taxable income?
Let me explain how you can benefit from the workspace-in-the-home tax break through an example. Kevin is a financial consultant and lives in a rented two-room apartment spanning 1,000 square feet in Toronto. He has a taxable income of $40,000. He uses 150 square feet of the space in his house for work, so he can deduct 15% of all his expenses under the workspace-in-the-home tax break.
Since he lives in a rented apartment, he can deduct the rent for the area he uses as his workspace. Now, his electricity bill comes to $2,000, maintenance expense $1,500, and heating cost $500. Also, he pays $10,000 as rent.
He can deduct 15% of these expenses from his taxable income. These expenses add up to $14,000, and Kevin can claim workspace-in-the-home tax break of $2,100 (15% x $14,000). Now, his taxable income amounts to $37,900 ($40,000- $2,100). Note that Kevin can’t deduct more than $40,000 in workspace-in-the-home expenses and show a loss. If his expenses do exceed his income, he can carry forward these expenses to next year provided he is still working from home and for the same employer.
According to the CRA, the federal tax rate for 2020 is 15% on the first $48,535 of the taxable income. This workspace-in-the-home tax break reduced Kevin’s federal tax amount to $5,685 ($37,900 x 15%). Without this CRA tax break, his federal tax would have come to $6,000 ($40,000 x 15%).
Make the most of your CRA tax break
The workspace-in-the-home tax break has helped Kevin save $315 in federal tax, which he can invest in Enbridge (TSX:ENB)(NYSE:ENB). Enbridge stock is trading at $38.07 and offers a dividend yield of 8.5%. In the Canadian Dividend Aristocrats list, Enbridge is among the top five.
Enbridge is important for the North American economy, as it accounts for 20% of natural gas transmitted to the United States and 25% of crude oil transported in North America. In the third quarter ended September 30, Enbridge’s net profit increased 4% year over year to $990 million, despite the upheaval caused by the pandemic. The company aims to save $300 million in cost in 2020. It is a good time to invest in its stock, as it took a hit from the pandemic and is trading close to its nine-year low.
Enbridge stock will give you an annual dividend income of $27 on your $315 work-from-home tax break.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.