Home-office expenses for incorporated business owners

Why incorporation changes the rules

As a sole proprietor, your business and you are the same taxpayer, so home-office costs go straight onto Form T2125 against your business income. Once you incorporate, the corporation becomes a separate legal person that owns the business and, typically, employs you. You no longer have "business income" personally — you have salary, dividends, or both. That means the corporation's home-office costs need to flow through a route CRA recognizes for a corporation-and-employee relationship, not through your personal T2125.

There are two accepted routes. Which one fits depends on how your corporation is structured and how you're compensated.

Route 1: the corporation reimburses you (accountable arrangement)

Under an accountable reimbursement arrangement, your corporation reimburses you personally for the business-use share of costs you paid out of pocket — utilities, home insurance, property tax, a portion of mortgage interest, and similar operating costs. To hold up under CRA scrutiny, the arrangement should be:

• Reasonable — tied to an actual business-use percentage, not a round number picked out of the air.
• Documented — supported by receipts/bills and a written calculation kept on file.
• Not a top-up — a true reimbursement of costs incurred, not a disguised extra salary payment.

Done properly, the reimbursement is deductible to the corporation and is not a taxable benefit added to your personal income. This is often the cleanest route for an owner-manager who takes both salary and dividends.

Route 2: T2200 + T777 employment expenses

If you're set up and paid as an employee of your own corporation, the alternative is the standard employment-expense route used by any employee who works from home: your corporation completes and signs Form T2200, Declaration of Conditions of Employment, confirming you were required (under your terms of employment) to maintain a workspace at home and to pay your own related expenses. You then complete Form T777, Statement of Employment Expenses, and claim your allowable costs on your personal return.

What's actually deductible

Under either route, the deduction is the business-use percentage of costs that relate to maintaining the workspace, generally including:

• Heat, hydro/electricity, and water
• Home insurance (business-use share)
• Property tax (business-use share)
• Mortgage interest (not principal) — on the T777 employment-expense route, mortgage interest is not an eligible claim for most employees; on the corporate-reimbursement route it can be included as a genuine occupancy cost, but the treatment needs to be set up correctly for your situation
• Minor repairs and maintenance tied to the workspace
• Internet and a reasonable share of phone costs (often tracked and claimed separately from the home-office percentage)

The CCA caution

Technically, a business owner can claim capital cost allowance (depreciation) on the business-use portion of a home. In practice, most accountants — including our team — advise against it for owner-occupied homes. Claiming CCA on part of your house can taint part of your principal residence exemption, meaning that portion of the home may no longer be fully sheltered from tax when you eventually sell. The modest annual CCA deduction is rarely worth the risk of a partially taxable gain down the road. Discuss this trade-off with your accountant before claiming any CCA on your residence.

Calculating your business-use percentage

The standard method: divide the square footage of the dedicated workspace by the total finished living space in the home. If the space is shared with personal use (a dining table doubling as a desk, for example), you also need to prorate for the percentage of time it's used for business versus personal purposes. Keep your math on file — a simple floor plan with the workspace measured and labelled is usually enough to support the claim if CRA ever asks.

Record-keeping that holds up

• Utility, insurance and property tax bills or statements for the year
• Your business-use percentage calculation and floor plan/measurements
• For Route 1: the reimbursement calculation and proof of payment from the corporation to you
• For Route 2: the signed T2200 on file (CRA can request it, though you don't file it with your return) and your T777 calculations

Which route should you use?

There's no universal answer — it depends on your salary/dividend mix, how your corporation is structured, and how much you're spending on the home office. A short conversation with your accountant before year-end is enough to set the right structure and avoid an awkward re-do later. This is exactly the kind of detail we walk through with incorporated contractors as part of year-end planning — see our year-end tax checklist for incorporated owners for the fuller picture.

The bottom line

Incorporating doesn't eliminate your home-office deduction — it changes the mechanism. Reimburse yourself properly under an accountable arrangement, or set up a T2200/T777 employment-expense claim, calculate a defensible business-use percentage, keep your records, and generally leave CCA on the home alone. If you're weighing incorporation itself, our incorporation calculator is a useful starting point, and our tax services team can set up whichever route fits your situation.

This article is general information, not tax advice — confirm your specific situation with EverStone CPA.

About the author

Sunny Dhillon, CPA

Founder of EverStone CPA, a family-owned Abbotsford firm, and a member of the Chartered Professional Accountants of British Columbia (CPABC). Sunny works with incorporated contractors and small business owners across Canada on tax, bookkeeping and advisory. More about Sunny →