The home office when you're incorporated: reimbursement or rent

Your corporation cannot deduct your home. It is a separate person from you, it neither owns nor rents the house, and the work-space-in-the-home rules filling the first page of search results are written for sole proprietors filing a T2125 — a form your corporation never touches. Two things work instead. The corporation reimburses you for the business share of home costs you actually paid, on documented bills and a measured percentage. Or it pays you rent, which becomes income on your personal return with consequences of its own.

What neither of them is: moving the hydro account into the corporation’s name and calling it overhead.

Why the sole-proprietor answer doesn’t reach you

Unincorporated, you and the business are one person. A share of the house costs comes off business income on the T2125 — the sole proprietor’s statement of business activities — subject to a limit that generally stops the claim from creating or increasing a loss, with the unused part carried forward indefinitely. Two tests open the door: the space is your principal place of business, or it is used exclusively to earn income and used regularly to meet clients.

Incorporate and that arithmetic disappears. The corporation earns the income and files a T2, its income tax return. The hydro bill arrives in your name, for a house the corporation has no interest in. There is nothing for the T2 to deduct until the corporation has actually paid something or actually owes you something. That is the whole shift, and it is why the tests you googled answer a question you no longer have.

Route one: the corporation reimburses what you paid

This is the clean one, and for most owners it fits. You pay the hydro bill. The corporation reimburses the business share of it. A reimbursement of a cost incurred on the corporation’s behalf is generally deductible to the corporation and generally not a taxable benefit to you, because you have been made whole rather than enriched.

Two conditions carry the route: the amount has to trace back to actual bills, and the share has to be defensible. What breaks it is a round number. A flat C$400 a month with nothing behind it is an allowance rather than a reimbursement, and an allowance is generally taxable in your hands — the corporation keeps its deduction, but you now pay personal tax on money you were treating as neutral. That is slightly more salary with extra steps, and none of the things salary actually buys.

The costs a reimbursement reaches are narrower than owners expect. Running costs sit at the comfortable end: hydro · heat · water · internet · repairs to the workspace itself. Mortgage principal is never a cost of anything, in any route. Mortgage interest, property tax and home insurance are the contested middle — costs of owning the house whether or not the corporation exists, and covering them starts to look like the corporation paying your personal expenses.

Route two: the corporation pays you rent

Write a lease, set a rent, and the corporation deducts the payments. On your side the rent is rental income, reported on the statement of real estate rentals with your T1, and you deduct the business-use share of home costs against it — a wider set than the reimbursement route reaches, because you are now the landlord: mortgage interest, property tax, insurance, utilities, maintenance.

Two things decide whether it is worth it. The rent is deductible to the corporation only so far as it is reasonable — roughly what an arm’s-length tenant would pay for comparable space, not the number that flatters the corporate return. And rent is ordinary income at your full marginal rate, with none of the gross-up-and-credit machinery that softens a dividend. Set it near the costs you deduct against it and the net is close to nothing; set it well above them and you have manufactured personal income to save corporate tax, which is backwards.

A GST/HST seam runs through it too: commercial rent is generally taxable where the landlord is registered, and the small-supplier threshold that usually keeps an individual out of that counts all your taxable supplies, not just the rent.

A narrower option sits behind both: as an employee of your own corporation you can claim employment expenses on your T1 with a signed T2200, the declaration of conditions of employment. That is where the exclusive-use test and the more-than-half-the-time principal-place test reappear, and it generally returns less than a reimbursement for more work.

Where this goes wrong

The common failure is the corporation “owning” the household. The utility account moves into the corporate name, the property tax bill gets expensed, sometimes the mortgage leaves the corporate account. Costs the corporation did not incur for its own purposes are generally denied on the T2, and the amount paid on your behalf is generally a shareholder benefit — taxable to you, with no offsetting corporate deduction. Booked against what the company owes you instead, it lands in the shareholder-loan account and starts that clock.

The second failure is quieter and more expensive. The rent route lets you claim capital cost allowance — depreciation — on the business portion of the house. Claiming it generally puts that portion’s principal-residence exemption at risk, and a change-of-use question sits behind it. The CRA generally leaves an ancillary home office alone where the use is not structural, the space stays subordinate to the home, and no CCA is claimed. The tax saved by depreciating 12% of a house is small. The exemption at risk covers the gain on 12% of the house, whenever you sell.

If your corporation is a personal services business, none of this survives — the home office is among the deductions a PSB finding removes.

What a defensible percentage looks like on paper

Measure the space. Square footage of the dedicated room over total finished area is the standard method; room count works where the rooms are genuinely comparable. Keep the arithmetic and the sketch — the percentage is the first thing a reviewer asks about. Two refinements save arguments later:

• Not every cost takes the same percentage. Floor area is right for heat and hydro. Internet and phone are apportioned on use, and a cost belonging entirely to the workspace — repainting that room — goes in whole.
• A room used partly for personal purposes is generally reduced again for the share of time it is actually working. A spare bedroom that hosts guests at Christmas is not a full-time office.

A worked example: a 12% office, reimbursed

Illustrative, round numbers, December 31 year-end. A consultant works through her corporation from a dedicated 150-square-foot room in a 1,250-square-foot house — 12%.

Her home costs for the year: hydro C$2,000, heat C$2,200, water C$400. That is C$4,600 of shared costs, and 12% of it is C$552. She also spent C$600 repainting and re-wiring the office room itself, which belongs entirely to the workspace and goes in whole. Internet runs C$1,200 and she can support 60% business use from her working pattern — C$720. Total reimbursement: C$1,872.

The corporation pays her that amount against a schedule listing each bill and the percentage applied, deducts it on the T2, and issues no slip — a reimbursement is not income. Nothing about the mortgage appears, nothing about the property tax, and no CCA is claimed on anything.

What it is worth: C$1,872 of deduction against active business income taxed federally at 9% on the first C$500,000 for an eligible CCPC in 2026, plus her provincial rate. Real, recurring, small. The reason to run it properly points the other way — an undocumented C$400-a-month allowance over the same year is C$4,800 the CRA can generally treat as income in her hands.

When a real office is cheaper than the argument

At some point the home office costs more in care than it returns in tax. A lease in the corporation’s name settles all of it: the corporation is the tenant, the rent is plainly its expense, GST/HST paid on it is recoverable as an input tax credit once the corporation is registered, and your house stops being a tax question. That crossover usually arrives with the first employee who needs somewhere to sit.

What Cadence does

We pick the route at the start of the year rather than reconstructing one in March: measure the space once, write down the percentage and the method behind it, then set up either a monthly reimbursement schedule or a lease with a rent we can defend. Not both, and not a number someone guessed. Where the rent route is on the table we price the principal-residence question before you commit, because that one is hard to unwind. The file sits inside year-round tax planning and gets re-checked when you move, renovate or hire — the three events that quietly make last year’s percentage wrong. It comes up in nearly every consultant and agency engagement, usually with a shoebox attached.