Personal Business

Home-office crackdown

Now that Quebec has tightened the rules for budding entrepreneurs, can Ottawa be far behind?

Ross Laver July 8 1996
Personal Business

Home-office crackdown

Now that Quebec has tightened the rules for budding entrepreneurs, can Ottawa be far behind?

Ross Laver July 8 1996

Home-office crackdown

Personal Business

Now that Quebec has tightened the rules for budding entrepreneurs, can Ottawa be far behind?

Ross Laver

It was bound to happen. At a time when well-paying jobs are in short supply and a growing number of Canadians are choosing—or being forced—to become self-employed, the tax man is making it increasingly difficult to set up and run your own business.

The problems go well beyond the GST and other dreaded examples of government-mandated paperwork. These days, one of the biggest thorns in the sides of budding entrepreneurs is Ottawa’s plan to step up the level of tax enforcement against small-business owners and other people who create their own jobs.

In its March budget, the federal government announced that it will hire 800 additional Revenue Canada auditors between now and 1998-1999, bringing the total to 8,980. According to Finance Minister Paul Martin, the decision to expand the number of auditors—at a time when almost every other branch of the public service is cutting back—is part of a crackdown on tax fiddling by self-employed individuals and unincorporated businesses. All told, the government figures it can pull in an extra $100 million a year by targeting taxpayers who conceal income or exaggerate deductible expenses.

Of course, it’s hard to sympathize with anyone who consciously cheats on his or her taxes. But along with the auditing blitz, it appears that Ottawa is considering other ways to make life more difficult for the self-employed—especially the country’s estimated 1.65 million home-based businesses.

Leading the way in this regard is Quebec, which runs its own tax-collection system and is therefore free to introduce changes without waiting to reach an agreement with the rest of Canada. In its May 9 budget, the province reduced by half the allowable home-office deductions for such costs as mortgage interest or rent, property tax, insurance, heating and electricity.

Previously, Quebecers who ran a business from home—like their counterparts in other provinces—were allowed to calculate the percentage of the living space

used for business and write off a proportionate share of their residential expenses. For example, a graphic artist whose office consisted of one room in an eight-room house could deduct one-eighth of his housing costs. (Workspaces are deductible only if they are segregated from the rest of the home and are used solely to earn business income.)

From now on, people who run homebased businesses in Quebec will only be able to deduct half of those eligible expenses. Why 50 per cent? The province hasn’t offered a rationale, beyond saying that homeoffice expenses “would in any event have been incurred by the taxpayer for personal use,” and “may not represent a significant marginal cost to be taken into consideration in the decision to carry on a business or exercise a profession at home.” Both of those propositions are eminently debatable, but the real reason is that the government needs more money and views small entrepreneurs as an easy target.

If you’re wondering whether the same rules will soon apply elsewhere in Canada, consider that three years ago Quebec cut the deduction for business-related entertainment expenses from 80 per cent to 50 per cent. Exactly a year later, Ottawa followed suit. Don’t be surprised if the same thing happens in the case of home-office expenses, perhaps after the next federal election. “Now that Quebec has brought this up, it’s certainly an area we have to look at,” says Kevin O’Grady, a finance department tax policy officer. He adds that the government is exploring several options, including matching Quebec’s move, disallowing any form of home-office deduction or capping the deduction as a proportion of business revenues.

If it does change the rules, Ottawa will undoubtedly argue that the existing deductions are being abused. But why should honest people suffer along with the cheaters? Reducing the home-office deduction is a strange way of rewarding people who, in an age of downsizing, are trying to become self-reliant or are struggling to get a new business off the ground.