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I'm not quite 100 percent certain, but I don't think you can create a loss based on home office expenses exceeding self-employment income, then apply that loss to reduce total taxable income from salary or other sources. (Otherwise we'd all be doing it: anyone with a regular job would set up very unsuccessful consulting business and write off $5k or more each year.) I don't know about real estate rentals, despite our best efforts we've never managed a loss on those.

What you can do, incidentally, is carry unused home office expenses forward from one year to the next, which is very useful. Some time ago I had a phase where for several years I worked on salary with barely any side jobs. Then I switched back to full-time contracting, and to my great joy the tax software delivered a huge accumulation of home office expenses carried forward, to the extent that I paid very little tax that year. To my even greater joy, CRA did not complain.
 

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Yes, I see that the net result of T2125 goes to line 9946. This can be positive or negative (a loss). This gets transferred to the main T1 return, maybe line 137 ... What I'm still not sure of, though, is whether line 137 permits a negative number.
Not sure why the confusion.

Lines 135 to 143 – Self-employment income
Report on the appropriate lines your gross and net income (or loss) from self-employment. If you have a loss, show it in brackets.
https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/5000-g/general-income-tax-benefit-guide-total-income.html#Lines135To143SelfEmploymentIncome

That's from the guide about the main return for that group of lines which the T2125 form line 9946 is transferred to.
After all - it's the only way for income < expenses to result in a reduction of other income that articles talk about.


Or does the tax software block you from doing that?
If tax software blocks a negative number - according to CRA's allowing a negative number, it would be a bug, AFAICT.


Of course if you still have tax software installed or do a fresh install, you can plug in for form T2125 income < expenses and follow the numbers through.


Cheers


PS
Another link says:
Once all your expenses are tallied up, you will deduct the total from your total business income, and the resulting profit or loss from form CRA T2125 will then be recorded on Line 135, 137, or 139 of your T1 return—depending on whether it's business, professional or commission income. This is your allowable claim which will ultimately be added to or subtracted from your other income, if any.
https://www.thebalancesmb.com/do-you-need-to-fill-out-canadian-income-tax-form-t2125-2948218
 

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In the specific case of home office expenses for self-employed, I think you may not be able to write off losses against regular income. I know for those years when I was earning salary and only doing one or two small jobs on the side, I was definitely not writing off X thousand in unused home office expenses, despite plugging all those numbers into the tax software. (I did get it all back a few years later thanks to the carry-forward, once I moved from salary to contracting.) Logically, if you could write those off each year there would be no need to carry anything forward.
 

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I'm not quite 100 percent certain, but I don't think you can create a loss based on home office expenses exceeding self-employment income, then apply that loss to reduce total taxable income from salary or other sources ... What you can do, incidentally, is carry unused home office expenses forward from one year to the next, which is very useful ...
Correct ... only when there is income can the "business use of home expenses" be used.

In Part 7 "Calculation of business-use-of-home expenses", the way this is prevented is line 14, which is transferred from Part 5 line E "Net income (loss) after adjustments" that has already had the other business expenses like meals/travel expenses/insurance etc. applied to it. Where income < business expenses, this will be a negative number that is recorded as zero.

What's allowed to be claimed that tax year is line 16, the lessor of lines 13 and 14, where zero will always be the low number.

Line 15 "Business-use-of-home expenses available to carry forward" is line 13 - line 14, which results in the carry forward amount.


Where one uses the same tax software year after year, this should automatically be carried forward to a year it can be used. IOW, the home expenses are deferred.


... (Otherwise we'd all be doing it: anyone with a regular job would set up very unsuccessful consulting business and write off $5k or more each year.)
The T2125 form prevents it for home office expenses but not for other business expenses.

That's where too many years of losses can trigger CRA to take a second look to determine if it is a legitimate business.


Cheers
 

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In the specific case of home office expenses for self-employed, I think you may not be able to write off losses against regular income ...
It seems you jumped the gun as I wasn't finished writing post # 24.

It agrees with you and details how "business use of home expenses" is limited to only business income, with any excess being carried forward. Similar to capital losses can only be applied to capital gains, with a carry forward.


Post # 22 is focused on whether a negative T2125 form line 9946 that includes other business expenses stays as a negative on the main tax return.



Cheers
 

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Right, thanks. I was going from memory here, not looking things up. Glad to know I was not wrong.

The carry-forward was pretty amazing. I switched from salary to contracting mid-year and literally owed nothing the following April. Can't believe they didn't ask questions about whether it was kosher to book a year's worth of home office expenses against one little freelance job, several years in a row, but it went through.
 

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Discussion Starter #27 (Edited)
I should clarify, the expenses I'm considering are travel (flights, hotel) and computer equipment (CCA), and I don't have any 'business use of home expenses'.

If I understand what you wrote, Eclectic, the kinds of expenses I'm talking about including CCA can still be included ... leading to a negative result that makes it onto T1 General... even if revenue is zero.

The Part 4 list of various expenses seems to include all of these (travel on 9200, CCA on 9936) before even getting to business use of home. Looking at the form, I now see where business use of home gets limited if there is zero revenue.
 

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I should clarify, the expenses I'm considering are travel (flights, hotel) and computer equipment (CCA), and I don't have any 'business use of home expenses'.

If I understand what you wrote, Eclectic, the kinds of expenses I'm talking about including CCA can still be included ... leading to a negative result that makes it onto T1 General... even if revenue is zero ...
Yes ... you can walk through the PDF version of the T2125 form here ... https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2125/t2125-18e.pdf


... Looking at the form, I now see where business use of home gets limited if there is zero revenue.
Part 4 expenses like travel or CCA are rolled up into the line that is allowed to be negative.

Part 7 expenses (i.e. business use of home) are limited to within that section to only be used that tax year when Net Income from Part 5 is positive.
Otherwise, it is a carry forward amount for a future year that has positive Net Income.


Cheers
 

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Discussion Starter #29 (Edited)
Thanks for the self employment tips so far. I now have a profitable business.

I'm trying to wrap my head around business use of home expenses. I'm a renter, and currently have a 1 bedroom apartment. I do all my work from home, so part of my living space can be expensed... scaled down by whatever ratio of time I use that space exclusively for business. I work about 40% of the time.

My current office space is 30% of the apartment, so current business use of the apartment = 30% x 40% of my living space, so it's actually a pretty small overall ratio (just 12%) of the apartment to expense.

I am considering getting a larger, 2 bedroom apartment. The rent is higher, but perhaps I can then dedicate an office space purely for work. What's tripping me up is whether I can call a home office (one room) 100% dedicated to business, even if I'm only running my business 40% of a regular day. Would CRA scrutinize "how much of my day is spent doing business in the room", or is the more important part that the room itself is 100% for business only, not personal.

Say this second room is 20% of my living space. Would the effective business use ratio be

20% x 40% of the day = 8% business use, or
20% x 100% business = 20% business use

I think this would make a big difference when deciding whether I should get a larger apartment. Any thoughts on this? My goal is to do this honestly, not try to get away bending rules.
 

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Say this second room is 20% of my living space. Would the effective business use ratio be
20% x 40% of the day = 8% business use, or
20% x 100% business = 20% business use
James, your initial math is off -- and not in your favour!

I do not believe you need to calculate the amount of time that you work. If the space is primarily used for business, it qualifies.
So, if you use 1 of your four rooms for work, you can write off 25% of your rent.

The relevant RevCan info is here:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-229-other-employment-expenses/commission-employees/work-space-home-expenses.html

More, from TurboTax:
https://turbotax.intuit.ca/tips/rules-for-home-offices-6100
 

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Discussion Starter #31
Wow am I that far off? Luckily I haven't filed anything yet (2019 is the first year).

But I am looking at another TurboTax page
https://turbotax.intuit.ca/tips/your-small-business-business-use-of-home-expenses-1164

Specifically this part, which is why I used that second scaling factor. This information is different than the other TurboTax page you linked

The second factor in the workspace calculation is the daily use of the space. For example, if your home office doubles as the kids’ playroom, an extra bit of math is required. You’ll need to determine the percentage of time you use the room for business. If the kids rule the room until bedtime, you may use the room for only 4 hours a day for business. If this is the case, you’ll divide the 4 hours a day the room is used for business by 24 hours in a day, which is 0.1667 or 16.67% of the time that the room is used for business purposes.
In my 1 bedroom apartment, I work at my single desk. I use this for everything, personal & business. This is why I used that 40% scaling in my example.
 

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Personally, I doubt very much that tax officials are checking your calculations to the second decimal place.

I also doubt that they will audit your work hours -- assuming your claim is reasonable. Note, that is the word used by Canada Revenue: "use a reasonable basis."

20% of an apartment for your kind of work is very reasonable.

That said, I'm not an accountant.
 

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Discussion Starter #33
Thanks. That certainly makes it a larger expense than I first thought.

I wonder if this can justify getting an extra room (larger, more expensive apartment)? The funny thing with apartments is that 1 bdrm apartments are pretty expensive per sq ft and you typically only pay a bit more for 2 bdrms.

Between those two choices, 2 bdrm apartments cost less $ per sq ft. Plus, it would create a more comfortable work environment since I can dedicate a room as my office.

I suppose I would have to calculate the after tax effect. It's not clear to me whether adding an extra room is worth it. It would be interesting if the after tax cost of housing turns out to be similar... in which case the larger apartment is the no-brainer (?)
 

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Thanks. That certainly makes it a larger expense than I first thought.

I wonder if this can justify getting an extra room (larger, more expensive apartment)? The funny thing with apartments is that 1 bdrm apartments are pretty expensive per sq ft and you typically only pay a bit more for 2 bdrms.

Between those two choices, 2 bdrm apartments cost less $ per sq ft. Plus, it would create a more comfortable work environment since I can dedicate a room as my office.

I suppose I would have to calculate the after tax effect. It's not clear to me whether adding an extra room is worth it. It would be interesting if the after tax cost of housing turns out to be similar... in which case the larger apartment is the no-brainer (?)
When we did the home office calculation, it was take the square footage of the dedicated office space square footage divided by total usable square footage (don't include closets and store). That amount percentage can be used against your rents.

In terms of a getting a larger place, taxes are not the right reason to do so. If you need a larger place for your office, then get a larger place, if you don't, then don't do it because of the tax implication. This would be like the tax tail wagging the dog. Or something phrase like that.
 

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Personally, I doubt very much that tax officials are checking your calculations to the second decimal place.

I also doubt that they will audit your work hours -- assuming your claim is reasonable. Note, that is the word used by Canada Revenue: "use a reasonable basis." ...
Probably .... but then again, when CRA was seeing lots of home office expenses abuse, I had to send follow up info despite how reasonable my numbers were and the form the employer provided confirming the eligible expenses. If it's seen as ripe for abuse, reasonable may not matter that much.


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Discussion Starter #36
When we did the home office calculation, it was take the square footage of the dedicated office space square footage divided by total usable square footage (don't include closets and store). That amount percentage can be used against your rents.

In terms of a getting a larger place, taxes are not the right reason to do so. If you need a larger place for your office, then get a larger place, if you don't, then don't do it because of the tax implication. This would be like the tax tail wagging the dog. Or something phrase like that.
Good tips and I think you're right, taxes should not impact the choice of apartment. I don't think I need more space for the work that I do... will stick with a small apt, lower rent.
 

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Discussion Starter #38
Lower rent gives you more flexibility for less work and more leisure activities, right? :biggrin:
Absolutely! I will stick with my frugal leaning and look for something smaller, to keep costs down.

By the way I am discovering a new joy to this self employment work. I have rediscovered the sheer joy of payday. In regular employment, I got used to the regular paycheque. It was just expected... I show up at work, do stuff, and get paid. Even if I was completely delinquent I'd be paid.

But now I'm spending real effort to keep the customers happy, doing project management, coordinating things. And when I do receive a payment on an invoice I find that I'm overjoyed by it. It's the fruits of my labour converted directly into cash and plonked into my bank account -- really feels great!

One reason it feels good is that more effort goes into, and another reason is that payment is uncertain. I don't expect it, and I know it can stop any time.
 

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Regarding business use of home. A relation who is an accountant some years ago pointed out that you can also include use of common areas during the work day - so the kitchen to make coffee, a bathroom to pee out the coffee, and hallways to reach both. I said would 30% of a moderate house raise flags? The answer was maybe, so I've gone with 29% ever since, and never a question. Apparently that is a "reasonable" number.

As to how carefully CRA looks at this, a while back I changed tax programs and failed to notice that the field for use of home switched from business (in the old program) to personal (in the new program). I punched in the usual number and only realized a year later that I'd claimed 71% of the house for work...
 
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