Principal Issues: In light of Jha v. Canada, [2002] T.C.J. No. 593, do technical interpretations 2002-0118727 and 2002-0120025 still reflect the Agency's position?
Position: Yes.
Reasons: The restriction in subsection 18(12) of the Income Tax Act does not apply where the individual incurs home office expenses to earn income from property.
Outaouais Tax Services Office Headquarters Business and Partnerships Division Attention: Mario Savard François Bordeleau, Advocate
2007-023568
Deductibility of home office expenses
This is further to your email of May10, 2007, in which you requested our opinion on the deductibility of home office expenses incurred to earn property income.
Specifically, you described a situation where a taxpayer owns an undivided interest in XXXXXXXXXX rental properties. You indicated that the taxpayer has claimed home office expenses in the amount of $XXXXXXXXXX on the basis that those expenses enabled him to earn income from property. According to the information provided, the taxpayer uses one room of his residence to manage and account for the XXXXXXXXXX rental properties and uses another portion of his residence as a storage area for supplies and other household appliances.
You wish to know whether Technical Interpretations 2002-0118727 and 2002-0120025 are still valid in light of Justice Angers' analysis in Jha v. Canada, [2002] T.C.J. No. 593.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Section 18 lists items that are not deductible in computing income from a business or property. In fact, that section presents a list of items that might be deductible if accounting concepts prevailed, but which are not, since tax law asserts its autonomy in this regard.1
In this context, subsection 18(12) is intended to restrict home office expenses that would otherwise be deductible in the course of carrying on a business. The Department of Finance Canada's Explanatory Notes to this provision read as follows:
Subsection 18(12) restricts the deduction of expenses incurred by an individual in respect of a home office. No amount may be deducted in respect of a “work space” in a self-contained domestic establishment in which the individual resides unless certain conditions are met. The work place must be either the principal place of business of the individual or be used by the individual exclusively for the purpose of earning income from the business and for meeting clients, customers, or patients on a regular and continuous basis.2
Under Technical Interpretations 2002-0118727 and 2002-0120025, the Canada Revenue Agency ("CRA") has determined that the restriction in subsection 18(12) only apply where an individual wishes to deduct home office expenses in computing income from a business. Where a taxpayer earns income from property and incurs home office expenses, the CRA has indicated that the deductibility of those expenses is subject to the general provisions of the Act dealing with the deductibility of expenses incurred to earn such income.
In Jha, supra, having found that the taxpayer derived income from property, Angers J. found that the taxpayer could not deduct any portion of the expenses he incurred for home office expenses. We note that the Jha decision originated in the informal procedure of the Tax Court of Canada and, as such, has limited jurisprudential value.
Thus, where an individual derives income from property - as is the case here - the CRA still maintains that subsection 18(12) cannot apply. We therefore confirm that the above interpretations continue to reflect the CRA's position in this area.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Interim Manager
Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 G. Lord et al., Les principes de l'imposition au Canada, 13rd ed., Montréal, Wilson & Lafleur, 2002, p. 199
2 Department of Finance Explanatory Notes to the Income Tax Act (Toronto: Thomson-Carswell, 2005) at p. 123