Introduction

The home office deduction is one of the most discussed expenses in small business tax — and one of the most frequently applied incorrectly by incorporated business owners. The rules that apply to a corporation are meaningfully different from the rules that apply to an unincorporated self-employed individual, and the confusion between the two is common.

The Fundamental Distinction: Whose Home?

When an unincorporated self-employed individual works from home, they claim a deduction on their personal T1 return for the portion of home expenses attributable to the business use of the home. This is a personal deduction available to a self-employed person under section 18(12) of the Income Tax Act.

When an incorporated business owner works from their home, the situation is different. The corporation is a separate legal entity. The home belongs to the individual, not the corporation. The corporation does not directly have the right to deduct the owner's home expenses — because those expenses are not expenses of the corporation.

Option One: Rent the Home Office to the Corporation

One approach is for the individual to rent part of their home to their corporation under a formal lease arrangement. The corporation pays rent to the individual for the business use of the home space. The rent payment is deductible to the corporation as a business expense.

The individual must report the rent received as rental income on their personal return. They can deduct the portion of home expenses (mortgage interest or rent, property taxes, utilities, insurance, maintenance) attributable to the rented space.

For this to be valid, the arrangement must be at arm's length — the rent charged should be reasonable (reflecting what a third party would pay for comparable commercial space) and documented with a formal lease agreement. The CRA may question a rental arrangement where the amount is set primarily to create a tax deduction rather than reflecting genuine market rent.

Option Two: Claim Through the Corporation as an Operating Expense

Where the home office is the corporation's principal place of business, and the space is used exclusively and regularly for the corporation's commercial activities, the corporation may be able to deduct a portion of home-related costs if those costs are paid directly by the corporation and are properly documented as business expenses.

This approach requires care. The CRA expects that amounts paid by the corporation for home expenses are genuine business costs — not a mechanism for paying the owner's personal living costs through the corporation (which would be a shareholder benefit). The deductible portion should reflect actual business use, supported by a documented methodology.

The Shareholder Benefit Risk

The most common error in this area is the corporation paying home expenses — mortgage interest, utilities, internet, property taxes — without a documented business rationale or lease arrangement, and treating them as corporate deductions. Where the CRA determines these payments primarily benefit the shareholder personally (because they relate to the shareholder's home), they may be assessed as shareholder benefits — taxable to the individual at their full marginal rate, with no corporate deduction.

What the CRA Expects in Documentation

Whether the corporation is paying rent under a formal arrangement or directly paying a share of home costs as business expenses, the CRA expects:

•  A written agreement or lease (for the rent approach)

•  A reasonable and consistently applied method for calculating the business use percentage (e.g., square footage of dedicated office space divided by total home square footage)

•  Documentation that the space is used exclusively for business and is not also used as personal living space

•  Consistency year over year — changes to the claimed percentage should be explained

Internet and Phone: A Common Add-On

Many incorporated business owners also claim the full cost of home internet and phone through the corporation. Where these services are used for both personal and business purposes, only the business-use portion is deductible. Claiming 100% of a home internet bill that is used 70% personally is a common overreach.

When to Speak With a CPA

If your corporation has been claiming home office costs without a formal structure — no lease, no documented business use percentage, no separation between personal and corporate payments — this is worth reviewing before a CRA audit makes it more urgent.

Rotaru CPA helps incorporated business owners structure and document home office arrangements that will hold up under CRA review. Book a consultation to review your situation.