Tax Considerations Related to Telework During the Pandemic
The information contained in the below publication was current at the time it was published. The COVID-19 programs evolve continuously, and the relevant information may have changed since publication. Readers are advised to discuss their particular situation with their Crowe BGK advisor.
Government measures associated with preventing the spread of COVID-19 have forced many Canadian workers to adopt telework. This situation raises questions about tax-deductible expenses for employees and their employers.
This publication discusses the tax considerations arising from the various measures that Canadian employers have implemented to support telework by their employees during the COVID-19 pandemic. This publication will also address the directives that Canadian tax authorities have issued to employers and how employers can prepare to meet the new requirements introduced in 2020.
EMPLOYEES - TAX CONSIDERATIONS RELATED TO TELEWORKING
Employer Reimbursement – Taxable Benefit
As a general rule, the Income Tax Act (“ITA”) provides that the value of any benefit received by an employee in the course of their employment must be included in employment income. The value attributed to the benefit is its fair market value. However, the taxation authorities have adopted specific rules for determining what constitutes a benefit to be included in an employee’s income. Generally, in order for a benefit to be taxable to an employee, the employee must receive an economic benefit that can be determined to have a monetary value and for which the employee is the primary beneficiary.
I. Telecommunication Expenses
If the employer reimburses the employee for the cost of a cell phone or Internet service at the employee’s home solely for the purpose of enabling the employee to perform their duties, it will generally not be a taxable benefit to the employee.
However, if the employee uses the cell phone or Internet service in part for personal use, the value of such personal use will be considered a taxable benefit to the employee. Tax authorities make an exception for cell phone service if the cost of the plan is reasonable, the plan is a basic plan with a flat rate, and the employee’s personal cell phone use does not incur additional charges to the plan. Under those specific circumstances, a personal cell phone use is not considered a taxable benefit to the employee.
If the employer pays the employee an allowance for telecommunication costs, the value of the allowance is considered a taxable benefit to be included in the employee’s employment income. In that respect, any payment an employee receives without having to account for its use is considered an allowance.
II. Home Office Equipment
Some employers have reimbursed the purchase of home office equipment (such as office furniture or computer equipment) during 2020, so that their employees can set up a home office space. This practice would normally constitute a taxable benefit. However, the Canada Revenue Agency (“CRA”) has indicated that, in the context of COVID-19, it will not consider any reimbursement by an employer for personal computer equipment purchases of up to $500 to be a taxable benefit to the employee. This policy also applies to office equipment. The CRA has clarified that, in order for the office or computer equipment to not be considered a taxable benefit, such equipment must be necessary for the employee to perform their duties from home.
Revenu Québec has adopted an administrative policy to the same effect.
III. Travel Expenses
In the context of COVID-19, in cases where an employee’s usual place of work is the employee’s home, the CRA has stated that reimbursement or payment of a reasonable allowance by the employer for commuting costs associated with travel between the employee’s home and the employer’s establishment will not constitute a taxable benefit to the employee.
Revenu Québec has not issued any comments regarding travel or commuting expenses.
Working at Home – Deductible Expenses for the Employee
An employee may deduct expenses associated with a dedicated work space in their home from employment income, provided that certain conditions are met. In order to simplify the claim of the home office expenses deduction for 2020, the CRA and Revenu Québec introduced two methods to calculate the deduction, which are the detailed method and the temporary flat rate method.
I. Detailed Method
An employee will be able to calculate his home office expense deduction for the year 2020 according to the detailed method if the following conditions are met:
1) The employee worked from home in 2020 due to the COVID-19 pandemic or the employer required the employee to work from
home.
2) The employee has not received and is not entitled to receive reimbursement from the employer for all his home office
expenses.
3) The home office is:
- where the employee primarily performs his or her duties (more than 50% of the time); or
- is used exclusively by the employee to earn employment income AND to meet with clients or others on a regular and continuous basis, in the normal course of the employee’s duties; and
4) The employee receives a T2200 (T2200S) form, certified and signed by the employer. Form TP-64.3 is also required for
employees who are residents of Quebec.
Form T2200 (or T2200S) certified and signed by the employer does not have to be submitted with the employee’s income tax return. However, the employee must provide a copy to the tax authorities upon request. Form TP-64.3 must be attached to the income tax return for employees who reside in Quebec.
Regarding the first condition, the CRA clarified that when an employee was not required to work from home in 2020 but the employer provided the employee with the choice to work at home because of the COVID-19 pandemic, the CRA will consider the employee to have worked from home due to COVID-19.
The CRA also clarified that an employee who has worked from home more than 50% of the time for a period of at least 4 weeks will be considered to have met condition 3) above. With regards to employees in Quebec, Revenu Québec has confirmed that an employee working from home during the COVID-19 pandemic will be considered to have reached the 50% threshold for the deduction of home office expenses if they actually worked at home more than 50% of the time during the period in question.
Once an employee has determined that they meet the above requirements, the following expenses that have not been and will not be reimbursed by the employer may be deducted from employment income:
a) Supplies that were used directly in performing job duties, including:
- Stationery items and ink cartridges
- Long distance charges for calls made for work
- The cost of a cell phone plan, the use of which is reasonably related to the performance of their duties (for employees in Quebec, these charges must be calculated in proportion to cell phone use in the performance of job duties).
The CRA has expanded the list of eligible expenses for the deduction to include the cost of home internet access.
Supplies do not include:
- Monthly Internet access charges (for the purposes of the Quebec income tax return only)
- Monthly landline service charges
- Cell phone purchases
- Purchase or rental of a computer and office furniture
- Amortization of principal or interest costs for a loan taken out to acquire various assets
b) Expenses related to a home office space, including:
- The portion of rent that corresponds to use of the space for the home office
- Electricity, heating and maintenance costs associated with maintaining the home office
An employee cannot deduct property taxes, home insurance premiums, mortgage interest or amortization of the cost of the building.
A calculator is available to employees who wish to calculate their federal home office expense deduction using the detailed method. The calculator is available through the link below:
Home office expenses that an employee deducts may not exceed the employment income earned by the employee who incurred the expenses. These expenses cannot be deducted from other income. If the employee cannot deduct all of his or her home office expenses in the same year, such expenses can be deducted the following year if the employee earns income from the same employer.
In the event of a more in-depth review by the tax authorities, the employee will be required to provide proof to support home office expense deductions claimed in calculating their employment income.
II. Temporary Flat Rate Method
An employee may claim a home office expense deduction on his income tax return under the temporary flat rate method (simplified method) if the following conditions are met:
1) The employee worked from home in 2020 due to the COVID-19 pandemic or the employer required the employee to work from home.
2) The employee has not received and is not entitled to receive reimbursement from the employer for all his or her home office expenses.
3) The employee worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020.
4) The employee is only claiming home office expenses and is not claiming any other employment expenses.
Each employee who works from home and meets the above eligibility criteria can use the temporary flat rate method to calculate their home office expense deduction. Following this method, an employee will be able to claim a deduction of $2 for each day worked from home in 2020 up to a maximum of $400 (or 200 working days) per person.
If the employee chooses to calculate the deduction for home office expenses using the simplified method, the employee does not have to calculate the area of his or her workspace and does not have to keep supporting documents. The employee does not need to obtain the T2200 (or T2200S) form certified and signed by their employer. Form TP-64.3 is also not required by Revenu Québec if the simplified method is used.
If this new method is used, the employee cannot claim other employment expenses for the year 2020.
EMPLOYERS - ADDITIONAL PANDEMIC-RELATED OBLIGATIONS
Relaxation of the eligibility rules for claiming the home office expenses discussed above will allow more employees to claim home office expenses for 2020, which will place an additional burden on employers.
The CRA published form T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19 on December 15, 2020. This document is a version of form T2200 that limits the disclosure of information to a minimum and will help expedite the attestation process. Revenu Québec released the 2020 version of the TP-64.3 form in October 2020. This new form asks additional questions about telework and may now be signed electronically by the employer. Revenu Québec will also introduce in 2021 an online service to facilitate the preparation of TP-64.3 forms intended for teleworkers.
Although the employer is not required to issue forms T2200 (or T2200S) and TP-64.3 to employees, it is responsible for certifying the contents of the form if the employee so requests. In that case, the employer must ensure that the information disclosed on the forms is accurate. Given the significant number of forms to be completed that employers should expect to issue this year, employers need to ask themselves even now whether they can properly certify all the information that must appear on these forms. If an employer is unable to attest that an employee has met the conditions for deducting home office expenses, the employee will not be allowed to claim the tax deductions (with the exception of the deduction for home office expenses using the temporary flat rate method discussed above).
In light of this, we suggest that employers with certain employees who have adopted home-based teleworking in 2020 to begin even now to compile the information that must be certified on the forms allowing employees to claim home office expenses for 2020.
Other Additional Requirements
Since 2020 has apparently not imposed enough constraints on Canadian employers, the CRA will require new information to be reported on T4 slips issued to all employees for 2020.
In addition to reporting employment income paid in box 14 of the T4 slip, all Canadian employers will be required to use the following codes to report employment income paid during the following periods:
Code 57: Employment income paid from March 15 to May 9
Code 58: Employment income paid from May 10 to July 4
Code 59: Employment income paid from July 5 to August 29
Code 60: Employment income paid from August 30 to September 26
As a final comment, all employers who were eligible for the 10% Temporary Wage Subsidy for Employers (TWS) announced in the early days of the COVID-19 crisis should be reminded of the obligation to complete and file Form PD27 with the CRA by December 31, at the latest. In order to verify if you are an eligible employer for TWS purposes, we refer you to our publication on this matter.
For more information, please contact your Crowe BGK advisor.