Principal Issues: [TaxInterpretations translation] Does section 18(12) of the Act apply to restrict expenses related to a self-contained domestic establishment but which are incurred for both business and personal purposes?
Position: No.
Reasons: The purpose of subsection 18(12) is to limit the deduction of expenses incurred by an individual in respect of a home office that is part of a self-contained domestic establishment in which the individual resides where certain conditions are not satisfied. If these conditions are satisfied, the deduction of expenses that had otherwise been determined to be deductible cannot be denied. If expenses were used for more than one purpose, i.e., business and personal, paragraphs 18(1)(a) and (h) apply and an apportionment between "business" and "personal" will have to be made on a reasonable basis.
September 29, 2004
XXXXXXXXXX Tax Services Office Headquarters N. Deslandes, CGA Audit Division
Attention: XXXXXXXXXX
2004-006731Working at home: Subsection 18(12) of the Income Tax Act
This is in response to your email of March 17, 2004 in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
You asked us about the meaning of the wording of subsection 18(12) of the Income Tax Act (the "Act"): “no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the “work space”) of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either (i) the individual’s principal place of business, or (ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business”.
You presented the situation of a dentist (self-employed) who has acquired a residence. He lives on the first floor but uses the basement solely for business. It has been determined, based on the application of paragraphs 18(1)(a) and 18(1)(h), that the business portion represents approximately 40% of the residence. Certain repairs of a routine nature were made in the years following the acquisition. Of those expenses, you have allowed 100% of those incurred strictly for business purposes and disallowed 100% of those incurred for personal purposes. Some expenses that could be described as "common" were incurred for both personal and business purposes. Those were disallowed as to 60%, i.e., according to the proportion of personal use in light of the application of paragraphs 18(1)(a) and 18(1)(h).
YOUR QUESTION
You asked whether the wording of subsection 18(12) might allow you to disallow the 40% proportion of the common expenses otherwise allowable as those expenses are not wholly attributable to the part of the self-contained domestic establishment that is used for business.
OUR COMMENTS
Subsection 18(12) provides that a self-employed individual is entitled, in computing income from a business for a taxation year, to deduct expenses, including depreciation, in respect of a portion of the self-contained domestic establishment in which the individual resides, only if the portion is used by the individual:
a) as the principal place of business of the business,
(b) exclusively for the purpose of earning income from a business and meeting clients, customers or patients on a regular and continuous basis in respect of the business.
The purpose of subsection 18(12) is to limit the deduction of expenses incurred by an individual in respect of a home office that is part of a self-contained domestic establishment in which the individual resides where certain conditions are not satisfied. If those conditions are satisfied, the individual may deduct the otherwise allowable amounts, but only to the extent of the individual's business income for the year. To the extent that the latter condition limits the deduction of a portion of workspace expenses in a given year, those expenses are treated as workspace expenses for the following year, thus allowing such expenses to be carried forward indefinitely.
In the case submitted, you have indicated that the dentist's place of work meets the wording of paragraph 18(12)(a) and that the dentist's income is sufficiently high such that paragraph 18(12)(b) is not applicable. Consequently, subsection 18(12) does not apply. You cannot use this subsection to disallow the business portion of the common expenses on the basis that those costs cannot be traced solely to the portion of a self-contained domestic establishment referred to in paragraph 18(12)(a). The allocation of common expenses, i.e., establishing the personal versus business portion, has already been determined pursuant to paragraphs 18(1)(a) and (h). The application of subsection 18(12) does not alter this initial allocation.
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.
Best regards,
Ghislaine Landry, CGA
Manager
Individuals, Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate