A member of the BCMA recently had home office deductions disallowed both on an initial audit and on subsequent appeal. The judgment has cost $5000 a year in additional tax to the member.

The tax department argued that the home office expense was not allowed as the physician did not see patients at his home. This was despite the fact that all bookkeeping for the corporation was performed at the home office, as well as e-mails and correspondence for hospital committee work. The office was also used for academic work as no academic office was available through the university. The physician did the majority of his teaching and corporation work from home. The home office remains a key and critical part of the overall practice of this physician.

The judgment was based on the assumption that the physician’s consulting rooms were considered as his office, although the consulting rooms are not suitable for record keeping or other business functions. The judgment makes no more sense than a carpenter being told that his home office was disallowed because he did not use his home office for cutting wood, or a farmer having his office disallowed because he did not milk his cows in his home.

It is not clear if this is an isolated judgment or whether this is an effort by Revenue Canada to disallow expenses that are a vital part of the business of practice of physicians.

I wish to hear from any other member of the BCMA with a similar issue with Revenue Canada and home office expenses. If enough members are interested then we may be able to file a class action appeal against Revenue Canada. A small amount of cash from each doctor may allow us to support this when as individuals we cannot fund an appeal. Please send your responses with an indication as to how much money you would be willing to support the appeal to:

Dr Alastair Younger
401–1160 Burrard Street
Vancouver BC V6Z 3E8
Fax: (604) 683-3464

—Alastair Younger, MD
Vancouver

Re: Home office and income tax deductions

The letter above discusses the issue of deducting the cost of in-home office expenses by physicians and in particular, CRA’s audit position of disallowing home office expenses to the significant disadvantage of one particular physician. As I do not have any details, I cannot comment on the specific case alluded to in the doctor’s letter, so I will confine myself to a discussion on the section of the Income Tax Act that deals specifically with home office expenses of self-employed individuals and to other issues raised in this letter.

Briefly stated, CRA’s position is set out in ITA S18(12), which reads in part: “…in computing an individual’s income from a business for a taxation year,

a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the “work space”) of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either

(i) the individual’s principal place of business, or

(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business; . . . “

It is important to note the “or” between (i) and (ii) in that the taxpayer must fulfill the requirements of either of these two options in order to be eligible for a deduction for in-home office expenses.

The background discussion when this legislation was originally drafted centred around CRA’s irritation at what they perceived were unreasonable and excessive claims by self-employed taxpayers. Their response, as is often the case when they scratch an itch, was the somewhat draconian legislation noted above that swings the balance far to the other side in their favor with a narrow set of parameters and little room for interpretation.

Turning to IT-514 issued by CRA which comments on their interpretation of this section, several phrases are important in this discussion:

(i) “individual’s principal place of business”—CRA takes the position that “principal” means chief or main place of business. In the case of physicians who have another office outside their home, the work space in the home must be the primary place where the business is conducted. The work space need not be used only in the business in order to meet the criteria that it be the primary place of business. Practically speaking, for most physicians having an office outside the home where they see patients, it is difficult to argue that this office outside the home would not be the principal place of business. The corollary to that would be that any physician who does not have a primary place of business outside the home office would be able to claim the expenses for the work space at home.

(ii) If the physician has an office out of the home which would qualify as the primary place of business, he or she will be excluded from the first option leaving him or her with having to fulfill the terms of the second option in order to claim the expenses of the work space in home. The second requirement above is a two-part requirement, the first one being that the work space in home must be used “exclusively” to earn business income and the second being that the work space must be used “continuously for meeting…patients of the individual in respect of the business.” IT-514 notes that CRA does not consider a physician seeing one or two patients a week in the work space as regularly or continuously meeting patients; however, a physician seeing on average five patients per day for five days a week would satisfy the requirement of regular and continuous.

Now that we have discussed the basic framework of the legislation and the administrative policy of CRA with regards to this legislation, we can deal with the practical issues.

Although I can empathize with the frustration of Dr Younger and colleagues with a similar issue, Section 18(12) is rather rigid and specific in its requirements, and it is not my experience that CRA audits or assesses on anything other than the letter of the law before them. The usual parameters of an expense being deductible if it is incurred in the process of earning income and it is reasonable are overridden where specific legislation exists and S18(12) relates specifically to this issue. I am not aware of any effort by CRA to disallow these deductions on a wholesale basis and, in fact, home office expenses are not generally part of CRA’s audit program. More often than not, these types of issues arise as part of a greater audit.

There was an interesting tax case (2002 DTC 3815) at the Tax Court of Canada that dealt with this issue with the taxpayer winning. The case involved a physician with a downtown office who also had a home office. CRA originally denied the claim for home office expenses, but on appeal the taxpayer’s claim was allowed. In short, the tax court concluded that as the taxpayer phoned and took calls from patients from home every evening, and that these phone calls could not be taken or made without the use of the home work space and, further, that the patients files were reviewed and completed on the taxpayer’s home computer system and that the telephone calls constituted medical hence billable acts, the taxpayer was entitled to the deductions claimed.

On the surface this case appears to be very encouraging for Dr Younger, however it must be noted that this tax court decision was an “informal procedure” meaning that it is not available for precedent for future cases. In addition, each appeal is decided on a fact basis, meaning that in order to be relevant to any other individual case, the fact patterns must match up and not be merely similar.

This brings us to Dr Younger’s call for a “class action appeal against Revenue Canada.” In spite of any sympathy I may have for Dr Younger’s indignation, there is no provision for a class action appeal to CRA. Appeals are heard on a case-by-case basis with each case having its own set of unique facts, and it is highly unlikely that all physicians would have exactly the same set of facts with respect to their claims for a home office deduction. The only joint appeals I am aware of are those involving syndicated investments where multiple investors are all affected by the audit findings on a principal investment or tax shelter. There are, however, class action lawsuits, and while I am no lawyer, my understanding is that these are considerably more expensive and time consuming to launch. It is also my observation that in legal challenges launched against the unfairness of legislation, the courts have generally held that in the absence of evidence to the contrary, legislation as represented by tax statute is a reflection of Parliament’s clear intention with regard to policy and it is not the role of the court to overturn this intention.

—George Martin, CGA
McMillan & Company Chartered Accountants