If you run your business from home, you're entitled to deduct a share of the cost of keeping that home — heat, electricity, insurance, and more. It's a real and often substantial deduction. But it comes with conditions that trip people up, a ceiling that surprises people, and one tempting move that can cost you far more than it saves.

This article is mainly for the self-employed — sole proprietors and partners who report on Form T2125. (If you're an employee, including an owner who's an employee of their own corporation, the rules are different — more on that near the end.)

TL;DR — The Short Version
  1. You can deduct a reasonable portion of your home costs — heat, electricity, water, home insurance, maintenance, property tax, rent, and mortgage interest (never the principal) — based on the share of your home used for business.
  2. You have to pass one of two tests first: the home workspace must be either (a) your principal place of business, or (b) used exclusively for the business and on a regular and continuous basis to meet clients or customers.
  3. Home-office expenses can't create or increase a business loss. If the business isn't profitable enough, the deduction is limited to bringing income to zero — and the unused portion carries forward indefinitely to a future year.
  4. Don't claim depreciation (CCA) on the home itself. It's allowed in theory, but it can jeopardize the principal-residence exemption and create a tax bill when you sell. Almost never worth it.
  5. "Reasonable" is the watchword. Use a defensible basis — square footage is the cleanest — and keep the bills.

Read on for the full deductible list, how the two tests work, the loss-limitation rule, and the depreciation trap.

What Counts

What you can actually deduct

You deduct the business-use portion of your home's operating costs. The eligible costs include:

The single most common mistake: deducting your mortgage principal. You can't. Only the interest portion of the payment is eligible — the principal is repayment of a loan, not an expense.

The Gatekeeper

The two tests — you only need to pass one

You can't claim business-use-of-home expenses just because you sometimes work at the kitchen table. The Income Tax Act sets two alternative gateways, and your situation has to fit at least one:

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Test 1: Principal place of business

The home workspace is where you mainly run the business. A freelance designer, a remote consultant, an online seller working out of a spare room — this is the test most solopreneurs meet.

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Test 2: Exclusive + client-facing

The space is used only for the business and used on a regular, continuous basis to meet clients, customers, or patients. Think of a therapist or tutor who also has an office elsewhere but sees people at home.

Meet either one and you can claim. Meet neither — for instance, you have a downtown office and occasionally catch up on email at home — and you generally can't.

Source: Income Tax Act subsection 18(12) (the work-space-in-home rules); CRA, Business-use-of-home expenses.

The Math

How to calculate your business-use percentage

You need a reasonable basis for splitting your home costs between business and personal use. The cleanest and most defensible is square footage: the area of the workspace divided by the total finished area of the home.

Worked Example — Square-Footage Method
Home office160 sq ft
Total finished area of home1,600 sq ft
Business-use percentage10%
Annual eligible home costs (heat, hydro, insurance, mortgage interest, property tax…)$24,000
Deductible at 10%$2,400

If the workspace doubles as personal space part of the time (a guest room, say), you should further prorate by the hours of business use. Exclusive-use rooms don't need that second step.

The Ceiling

The rule that quietly caps your claim

Here's the part people miss until their accountant points it out: business-use-of-home expenses cannot be used to create or increase a business loss.

If your business income before home-office expenses is, say, $1,500, you can only claim up to $1,500 of home-office costs this year — enough to bring your business income to zero, but no further. The good news: the portion you couldn't use isn't lost. It carries forward indefinitely and can be claimed in a future year when the business has enough income to absorb it.

The home-office deduction can take your business income to zero — but it can't push it into a loss. The rest waits for next year.

Home-office expenses can reduce your business income to zero but not below it. If your eligible home-office costs exceed your income before those costs, the excess is not lost — it carries forward to a future year. THE DEDUCTION STOPS AT ZERO — THE REST CARRIES FORWARD income floor: $0 (can't go below) $1,500 Income before home-office costs $1,500 Claimed this year (income → $0) $900 Excess carried forward to next year $2,400 in eligible costs, $1,500 of income → claim $1,500 now, carry $900 forward.
With $2,400 of eligible home-office costs but only $1,500 of income before them, you claim $1,500 this year (bringing income to zero) and carry the remaining $900 forward indefinitely.
The Tempting Trap

Why you shouldn't claim CCA on your home

Technically, if you own your home, you could claim capital cost allowance (CCA) — depreciation — on the business-use portion of the building. Don't do it without serious advice. Claiming CCA on your home can disqualify that portion from the principal-residence exemption, which is what normally lets you sell your home tax-free. Trade a few hundred dollars of annual depreciation for a capital-gains bill on part of your house when you sell, and you've made a bad deal. For nearly every solopreneur, the right move is to skip CCA on the home entirely.

If You're Incorporated

A note for owner-employees

If you operate through a corporation and you're an employee of it, you don't use Form T2125. Your options are different: the corporation can reimburse you for a reasonable share of home costs under an accountable arrangement (done right, that's not a taxable benefit), or you may claim employment expenses with a signed Form T2200 from the corporation — a narrower list than the self-employed rules allow. (The temporary flat-rate method from the pandemic years no longer applies.) If you're incorporated, talk to us about the cleanest way to handle a home office — it's usually a reimbursement, done properly.

Before You Claim

A practical checklist

Tracking the right home costs through the year — and applying the loss limit and carryforward correctly — is the kind of detail a good bookkeeper handles automatically. That's part of what's included in every CDL plan, and you can estimate the cost in about a minute.

The Bottom Line

A real deduction, with real guardrails

The home-office deduction is genuinely valuable, and most people who work from home are leaving money on the table by not claiming it properly. But it isn't a free-for-all: you have to pass one of the two tests, you can only deduct the business share, you can't create a loss with it, and you should leave your home's depreciation alone. Get those four things right and it's one of the cleanest write-offs a small business has.

A Real-World Example

The deduction Élise almost claimed wrong

Meet Élise, a freelance translator in Gatineau who works from a spare bedroom. She'd heard you can "write off your home office," so at tax time she tried to deduct a big chunk of her entire mortgage payment plus a slice of every household bill.

Two problems. First, she was including her mortgage principal — but only the interest portion is eligible. Second, she'd had a slow year, and her full home-office claim would have pushed her business into a loss, which the rules don't allow. Her claim, as drafted, was both overstated and partly inadmissible.

You can write off the spare room — not the mortgage, and not into a loss.

What should have happened: Élise measures the workspace as a share of her home's square footage, deducts that percentage of the eligible costs (interest, not principal), claims only up to bringing her income to zero and carries the rest forward, and skips CCA on the home to protect her principal-residence exemption. A clean, defensible claim — and she still gets the deduction, just correctly.

Not sure you're claiming your home office correctly?

It's one of the most common deductions to get slightly wrong. A 20-minute call is usually enough to make sure you're claiming everything you can — and nothing you shouldn't.

Book a Free 20-Minute Call

This article is for informational purposes only and does not constitute tax advice. Home-office rules differ between self-employed individuals and employees, and outcomes depend on your specific situation. Consult a qualified professional before claiming, especially before claiming any capital cost allowance on your home.

References

Primary sources, linked so you can read and interpret them yourself. Legislative links open on the official Justice Laws Website; agency links open on Government of Canada websites.