# Contracting company run out of your home/tax write offs



## Addy (Mar 12, 2010)

My husband and I are struggling with a disagreement on what type of home to buy. He is being posted (military) and there's a good chance he will be posted again in three years (although he could easily stay where he is as well). We will not rent due to many reasons. There is a strong market to rent furnished rooms, so we will be taking advantage of this.

The disagreement lay between me wanting to buy an older, modest home for under or around $200K. We could most likley pay cash for this type of home. My husband wants to buy a larger, nicer home which would mean paying a max of ~$400K for a house.

My husbands reasons are:
1. Nicer, larger house without any need for renovating it
2. We can charge a bit more $ for the rooms if the house is larger/nicer
3. He has a construction contracting business and will be writing off a fair portion of the house (ie he needs an office to meet clients, a bathroom for clients, and lots of storage which would mean he would be able to write off the garage completely).

Of course I want the nicer, bigger house as well, but am a bit hesitant to take on a mortage again, especially a $175 or $200K one. To me it does make sense to have a ready-to-move-into home vs one I would want to do some renovations on.

My question is, does anyone here operate a contracting (plumbing, electrical, etc) business out of their home, and do you find the write offs are worth it? This may be the deciding factor on if we purchase a cheap house or a nicer more expensive house. Would this be something a tax accountant would be willing to discuss with me ahead of time? We do not live in the same province as we would be moving to, and although we have found out all the requirements for operating said business, I'm not sure where to find out details about what we can write off - does CRA have this information easily accessible?


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## jamesbe (May 8, 2010)

Sorry if this is too far off-topic / derails slightly but I think it is relevant.

Are you still looking at Pembroke? Reason I ask is, a small town like Pembroke homes at $400k are not the norm so come time to sell this may be a huge issue. If this was a large market like Ottawa then I'd say not a problem really.


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## Plugging Along (Jan 3, 2011)

We don't run a constustion business, but do run a business out of our home.

You only get to write off a portion of the homes expenses, and the mortgage interest portion only (not principle). You do not write off the garage, as it is not deemed livable space. You write off the portion against the livable space. In terms of the bathroom, if the bathroom is solely for clients, then it is fine, otherwise, you only get to do a percentage. 

In a larger house, unless the office is porportionately larger, then you will end up writing a smaller percentage off, even though the dollar value may be higher. For example, in the smaller house, if the house 1500 sq ft, and the office is 150 sq feet, then you would write off 10%. In the larger house of 3000 sq ft, the office may be 200 sq ft, therefore on 6.67% of expenses. 

In terms of the room, are you going to really be able to charge that much more that will cover the additional expenses you will inoccur with a larger house.

I'm all for getting a larger house without renos. It comes down to the affordability and your comfort level. 

If the deciding factor is the tax deductability of the home, then you should not do it.


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## Plugging Along (Jan 3, 2011)

In terms of a tax accountant, if you have one already, they should be able to answer some questions. Mine always answers all of my questions like this, but we have a long relationship. If not, most accountants will want more detailed information, as it really is dependant on your situation. Some will give you basic information.


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## MoneyGal (Apr 24, 2009)

Addy - there is lots of information available on the CRA website and other sites as well. I don't have time at the moment to do a comprehensive post...but I did want to alert you to ONE thing which may affect how you think about whether the deductions are worthwhile for you: if you are running a business part time (and if your husband is working full-time, this will be a part-time business by necessity, right?), you must adjust your deductions to account for the number of hours during which business is conducted in your house. 

Example: Let's say you have $10,000 of mortgage interest in a given year, and you are using 20% of your total home space for business purposes (office to meet clients, garage for storage, bathroom for client use). You might think you could deduct ($10,000*.2 =) $2000 of mortgage interest, right? 

Not exactly. You actually have to calculate the number of hours you spend working on the business, divide that number by 24 (hours in a day), and then multiply the result by the business portion of your total home expenses.

So let's say your husband works at the contracting business for a total of 2 hours every day. How much of that $10,000 in mortgage interest can you actually calculate? Here's the equation ((2/24)*0.2)*10000 = $167. 

I know that the garage is used 100% of the time for storage. But that isn't the point. The point is that you must adjust the usage based on the proportion of time you (your husband) actually spends working on the business. 

The bottom line is that in order to justify the scenario you are describing, you typically have to work at a home-based business for many hours in addition to your regular job. You need to be clear that you (he) will essentially need to work a second full-time job (at home) in order to justify writing off a large proportion of your home-based expenses. Is it really worth it?


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## MoneyGal (Apr 24, 2009)

Plugging Along said:


> You do not write off the garage, as it is not deemed livable space. You write off the portion against the livable space.


Huh. I was curious about this, so I referred to the CRA bulletin on workspace in the home:

http://www.cra-arc.gc.ca/E/pub/tp/it514/it514-e.html

It does seem like you can only take deductions against liveable space. I had not heard this before, though (I've never dealt with a business that had a garage...)


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## Addy (Mar 12, 2010)

Thanks everyone! Of course I don't like what I'm hearing simply because I was hoping to write off a lot of stuff,  but it's information we need to hear to make the best choice for our family. I'll check the CRA website and do some reading up as well.

Thank you!


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## jamesbe (May 8, 2010)

That is interesting. I have to store sometimes 3-4 cars in my driveway. That's a lot of LAND and costs money, I could deduct $50 a month for storage fees. My accountant has been just increaseing my home usage (10% for example) to cover it.

Not sure if this is correct or not though.


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## MoneyGal (Apr 24, 2009)

Well, there's the letter of the law, and then there's what people do in practice. It's all about what survives an audit...and how confident you are you won't be selected for an audit...


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## Berubeland (Sep 6, 2009)

I run a business out of my home now and long ago it used to be a construction business. I did "overclaim" I guess, my back yard and garage and storage space used to be for building supplies. I also had an office that occupied the entire main floor except the bedrooms. I a full 50% which my accountant informed me was ambitious until I described the situation to him. 

However, the money I made by renovating this wreck of a house was far more than the income tax deductions. It was hell to live here while this was going on but I figured I added at least 50K in value at that time by installing a kitchen and upgrading the bathroom, adding a laundry room and expanding the basement apartment to a 2 bed from a 1 bedroom. I also changed all the flooring, repaired walls, removed many walls and so on. 

Most of these improvements were written off, we had to improve it so it would work out as an office. I still live here so I have not realized these gains nor do I plan to anytime soon. But if you can add value in the short term by renovating I would. 

That's my two ce


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## jamesbe (May 8, 2010)

MoneyGal said:


> Well, there's the letter of the law, and then there's what people do in practice. It's all about what survives an audit...and how confident you are you won't be selected for an audit...


Agreed.

I (probably falsely) assume that my large income to deduction ratio should keep me safe. Probably 2% of my income is absorbed in deductions.


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## Plugging Along (Jan 3, 2011)

MoneyGal said:


> Huh. I was curious about this, so I referred to the CRA bulletin on workspace in the home:
> 
> http://www.cra-arc.gc.ca/E/pub/tp/it514/it514-e.html
> 
> It does seem like you can only take deductions against liveable space. I had not heard this before, though (I've never dealt with a business that had a garage...)


The only reason I know this one is because when our second child was born, we temporarily moved our office the the garage. Our accountant told us about the implication on our taxes.


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## MoneyGal (Apr 24, 2009)

That is a very reasonable assumption. Large deductions relative to income get flagged automatically (i.e., by computer matching).


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## Four Pillars (Apr 5, 2009)

I never heard about the number of hours you need to work in the home. From what I understood, if you maintain an office in the house - you can write it off. Regardless of the number of hours you work in the business or in the office.

I would talk to a CPA. I got one last year, and he was great for this kind of stuff. It's not rocket science, but I would rather get his advice and if I get audited, I can say I just followed the recommendation of the accountant.

In my case, he said to calculate the square footage of the office as a percentage of the house. Then I can write off that percentage of all the house costs such as:

Interest on mortgage
Utilities - water, hydro, gas, internet. 

I can't remember exactly, but I think house maintenance costs are included as well.

As for your original house size question - I don't know. I would prefer to rent if it possible that you might be moving in 3 years.


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## Addy (Mar 12, 2010)

Four Pillars said:


> As for your original house size question - I don't know. I would prefer to rent if it possible that you might be moving in 3 years.


I was hoping no one would mention renting!  We will not rent, there's absolutely no possibility of it happening so we have to consider various purchase options (keeping in mind we pay nothing to move, actually make a bucketload of money off the move).

It does sound like a modest home is the way to go if the deciding factor is business write offs. I still like the idea of a move-in-ready house, but that means me getting over the loathing of having to pay lots of interest on a mortgage (seems like wasted money to me).

How does one go about finding a good tax accountant? Is this something one could do from afar? For example, if the accountant lived in Vancouver but we were moving to Northern BC, would it be reasonable to deal with an Accountant in the lower Mainland if we found one that was awesome?


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## billiam (Aug 24, 2009)

> I never heard about the number of hours you need to work in the home. From what I understood, if you maintain an office in the house - you can write it off. Regardless of the number of hours you work in the business or in the office.


If you read the IT carefully and refer here:

http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-e.html

at Line 9945 you do need to further analyze the business use when the area is used both for business and personal living (where condition 1(a) of the IT applies only).


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## Four Pillars (Apr 5, 2009)

Addy said:


> I was hoping no one would mention renting!  We will not rent, there's absolutely no possibility of it happening so we have to consider various purchase options (keeping in mind we pay nothing to move, actually make a bucketload of money off the move).
> 
> It does sound like a modest home is the way to go if the deciding factor is business write offs. I still like the idea of a move-in-ready house, but that means me getting over the loathing of having to pay lots of interest on a mortgage (seems like wasted money to me).
> 
> How does one go about finding a good tax accountant? Is this something one could do from afar? For example, if the accountant lived in Vancouver but we were moving to Northern BC, would it be reasonable to deal with an Accountant in the lower Mainland if we found one that was awesome?


Keep in mind the amount of risk when buying for the short term. You could lose a bundle (and make a bundle).

I got my accountant who seems decent from a neighbour. I've never met him in person, so I don't think it matters how far away you are.


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## Four Pillars (Apr 5, 2009)

billiam said:


> If you read the IT carefully and refer here:
> 
> http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-e.html
> 
> at Line 9945 you do need to further analyze the business use when the area is used both for business and personal living (where condition 1(a) of the IT applies only).


Thanks, but I don't want to read it. 

That's why I have an accountant.


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## marina628 (Dec 14, 2010)

I have a 3200 sq ft Bungalow and last tax year i wrote off $3500 as rent for my home office.I work about 16 hours a day and my office is less than 200sq ft.This was done by my accountant and what we deemed to be a fair price based on interest I paid on my mortgage ,utilities ,property tax etc.I never wrote off any phone expenses for the business until November 2009 when i bought a blackberry in Business name.Some would probably write off portion of home phone but I always assume I will get audited and figure best to have the bills in the business names that we claim.


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## OhGreatGuru (May 24, 2009)

billiam said:


> If you read the IT carefully and refer here:
> 
> http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-e.html
> 
> at Line 9945 you do need to further analyze the business use when the area is used both for business and personal living (where condition 1(a) of the IT applies only).


That makes sense. I hadn't heard MoneyGal's interpretation of doing an hourly calculation before. It only makes sense in a multipurpose room. Which is why most people try to assign a specific area that is used (more or less) exclusively for the business. Which in turn is why, apart from the "Home Office", it's hard to claim much of the rest of the house.


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## MoneyGal (Apr 24, 2009)

I don't really want to claim this as my interpretation. I have been through several audits - not just my own field audits, but as a tax preparer I have been involved in audits for clients as well, and I know this interpretation of the rules is used by CRA. CRA will always have a "reasonableness" test (also called the "smell test") and you must be able to pass it. 

When the amounts are small, I don't think there's any real issue. But when a home-based business shows losses (not, obviously, from workspace in home expenses) you can expect increased CRA scrutiny, and I got this interpretation of the workspace in the home rules directly from CRA.


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## marina628 (Dec 14, 2010)

Addy said:


> My husband and I are struggling with a disagreement on what type of home to buy. He is being posted (military) and there's a good chance he will be posted again in three years (although he could easily stay where he is as well). We will not rent due to many reasons. There is a strong market to rent furnished rooms, so we will be taking advantage of this.
> 
> The disagreement lay between me wanting to buy an older, modest home for under or around $200K. We could most likley pay cash for this type of home. My husband wants to buy a larger, nicer home which would mean paying a max of ~$400K for a house.
> 
> ...


The conclusion probably is do not count on huge deductions to offset the big costs of the $400,000 house. Even if you write off 50% of expenses on that $400,000 house you are looking at maybe $7000 a year in deductions .Doing this will likely get you audited one day.
I don't mind sharing our company paid taxes on mid $xxx,xxx in last year end and we claimed $1500 for our cottage(Mortgage free) that we used to entertain corporate clients from May -September and another $3500 for the office in our home.when you look at the net revenue vs office expenses we were about 1% in deductions.


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## Four Pillars (Apr 5, 2009)

marina628 said:


> The conclusion probably is do not count on huge deductions to offset the big costs of the $400,000 house. Even if you write off 50% of expenses on that $400,000 house you are looking at maybe $7000 a year in deductions .Doing this will likely get you audited one day.
> I don't mind sharing our company paid taxes on mid $xxx,xxx in last year end and we claimed $1500 for our cottage(Mortgage free) that we used to entertain corporate clients from May -September and another $3500 for the office in our home.when you look at the net revenue vs office expenses we were about 1% in deductions.


Agreed - unless the business takes up a significant portion of the house - the deductions aren't all that much.


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## kcowan (Jul 1, 2010)

And business in the home expenses cannot be used to increase the loss in a home-based business so the deduction can be used to reduce the profit to zero and then the rest is carried forward.


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## marina628 (Dec 14, 2010)

I know a few others in my line of work and one guy living in Toronto leased a $80,000 BMW paying crazy rates and traveled the world 'on business' ,wrote off excessive house expenses just to get himself down to minimum tax.He has not paid any business taxes in 3 years and made over $400,000 a year with no employees or monthly expenses beyond a few hosting charges for websites.When he filed last year he got audited and CRA hit him with nearly $100,000 tax bill.
We have a company car and last month my husband claimed about $70 for gas ,he paid all the other gas personally because we were not driving to meet business clients.I know some people who get gas bills from their neighbors to claim as expense in their business lol.
You can rent a large storage unit for about $200 a month so if your business requires storage better to pay that bill and create a legitimate expense than try to justify in your own head writing off all your home expenses.


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