Quebec Update: Teleworking: What are the allowable expenses for employees and tax impacts for employers?

The COVID-19 pandemic has changed Canadian workplaces. For many organizations, the pandemic and its containment measures have fast-tracked the shift to teleworking. 

In this context, the Canada Revenue Agency (the “CRA”) and the Agence du Revenu du Québec (the“ARQ”) have published administrative positions regarding deductible expenses for employees working from home.  

Allowable expenses for an employee

In general, an employee (whether a tenant or a homeowner) may deduct reasonable expenses directly related to the use of space in the home for work if and only if at least one of the following two conditions is met:

The space devoted to work in the home is “the place where the individual principally (interpreted by the courts to be more than 50%) performs the duties of the office or employment”; or 

The workspace in the home is “used exclusively […] for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment;”

Such expenses may include, but are not limited to, costs for:

• Heating;
• Electricity;
• Light bulbs;
• Cleaning products; and
• Minor repairs.

If the workspace is part of a residence rented by the individual, a reasonable portion of the rent may be deductible.

However, an individual may not claim any deduction for the rental value of the workspace in a home owned by the individual or for amortization, taxes, insurance or mortgage interest in respect of that home. Notwithstanding the above restrictions, the Income Tax Act provides that  employees remunerated by commissions may deduct a reasonable portion of the taxes and insurance paid for the home they own, if one of the above criteria is met.

It is important to note that these expenses are eligible only to the extent that they are not otherwise reimbursed by the employer.

In order to determine the amount that can be deducted in this way, it is important to use a reasonable basis for calculation.For example, the calculation can be based on the area of the workspace in proportion to the total area of the home. Other possible uses of space must also be considered. The use of 100% compared to 75% of the space by an employee is an important factor in the calculation. For example, a kitchen table used as office space by an employee will have mixed use, which will have a direct impact on the amount of deductible expenses.

Note that if an employee can deduct an expense in calculating taxable income for income tax purposes, they may also qualify for a refund of the Goods and Services Tax / Quebec Sales Tax (“GST/QST”) paid. GST and QST refunds are taxable and must be included in the employee’s income tax return the following year.

It is also important for the employee to keep supporting documents.

An employee will have to complete the following forms to deduct expenses and obtain GST and QST refunds:

• T777 – Statement of Employment Expenses;
• TP-59 – Employment Expenses of Salaried Employees;
• GST370 – GST/HST Rebate Application; and
• VD-358 – QST Rebate for Employees.

In order to deduct employment expenses from income, including certain expenses related to space devoted to working from home, the employee must have received two forms from the employer:

• Form T2200 – Declaration of Conditions of Employment (“T2200”); and
• Form TP-64.3 General Employment Conditions (“TP-64.3”) (Quebec employee only);

Considerations for the employer

For an employee to be able to deduct the expenses described above, redesigned T2200, as currently proposed by the CRA, must indicate:

Whether or not the employee was under an obligation to work primarily from home; and

Whether or not the employer has reimbursed the employee for certain expenses related to telework and, if so, the amount of such reimbursement.

The CRA has previously expressed its position that an obligation to work from home need not be set down in writing. Rather, a “meeting of the minds” between the employer and the employee that the employee’s work must be done from home is sufficient to meet this criterion. There is uncertainty as to whether an employee who has chosen to work from home without being “required” to do so will be able to claim the expenses mentioned above.

Clarifications from the CRA are expected shortly on the expenses eligible for deduction, the calculation of the eligible amount and the notion of “meeting of the minds” in relation to telework.

It is expected that a large number of employees will meet the criteria for this deduction, at least as long as the workplace access restrictions attributable to COVID-19 remain in place. Even in its redesigned and shortened form, T2200 remains a significant administrative burden, particularly for large employers with hundreds of employees. Several stakeholders from the tax and business communities have communicated their concerns about the “light” T2200 to the CRA.

The ARQ, for its part, has announced that, exceptionally, an electronic signature of the employer on the TP-64.3 form would be permitted.

Other allowable expenses for an employee

An employee will also be able to deduct certain expenses for supplies consumed directly in the course of their duties to the extent that they are not reimbursed by the employer, such as:

Paper, pencils and ink cartridges;

Internet costs, if they are charged based on usage. Given that internet services in Quebec are normally billed on a monthly basis, this expense is generally not deductible.

Expenses reimbursed by an employer

Normally, an amount received from an employer to reimburse an expense is considered a benefit to the employee and must be added to the employee’s employment income, unless such expenses are necessary for the performance of the employee’s duties.

Employees may not deduct reimbursed expenses.

In addition, in the current context, the CRA and the ARQ have announced that the reimbursement of $500 by an employer to an employee to offset the cost of acquiring personal computer equipment or office equipment required for telework does not constitute a taxable benefit to the employee. For example, if the purchase is a $1,000 desk, the taxable benefit included in the employee’s income will be $500.

The CRA has recently announced that this amount will not be increased.

Additional federal deduction of $400 without T2200

On December 1, 2020, the Government of Canada announced that employees working from home will be able to deduct up to $400 from their income for 2020 without having to provide details of expenses incurred in connection with telework or having to obtain a T2200 form from their employer. More details regarding this announcement are expected in the coming weeks.

Allowance paid by an employer

Some employers will prefer to pay an allowance directly to their employees who are teleworking to cover the additional costs they incur. In this context, the employer will be able to deduct this allowance in the calculation of its taxable income, provided that it is a reasonable amount.

Normally, the amount of this allowance will be treated as a taxable benefit to the employee and will have to be included in employment income for the taxation year in which the employee receives it, except in the situation covered by the exception mentioned above.

Other considerations for the employer

It is also important for the employer to consider the tax implications particularly with respect to source deductions of the location where the employee primarily works during the pandemic if it differs from the location of the employer’s establishment where they normally report for work. 

The CRA and the ARQ have announced relief in this respect for the 2020 taxation year. For example, the province of work will not change for employees who work from home because of the COVID-19 pandemic. The province for the purpose of calculating source deductions will continue to be the province of the normal place of work. However, if the employee performs their work in a foreign country, certain tax implications for both the employee and the employer should be considered.

By Marie-France Dompierre & Etienne C. Laplante, Lavery, Quebec, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact canada@transatlanticlaw.com

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