CRA battle shows what’s involved when you take on the taxman

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“Uptown, downtown. No one’s fussy, I’m a target. Black, white, day, night. No one’s fussy, I’m a target.” ~ Joe Jackson

This lyric comes to mind each time I get another piece of correspondence from the Canada Revenue Agency. My friends and family often joke that since I write a nationally syndicated tax column, where I occasionally highlight the trials and tribulations of ordinary taxpayers as they battle with the taxman, it makes me a target, which is why I seem to get audited by the CRA on a regular basis.

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Frequent readers may recall my fight with the CRA over my transit passes and, more recently, the reassessment of my 2020 work-from-home expenses. My latest dispute with the CRA, also involving home-office expenses, but for the 2021 tax year, came to a mostly favourable conclusion when I agreed to a settlement offer proposed by the CRA, and received my formal notice of reassessment last week.

I’m sharing the details of my latest battle with the tax agency to show you what’s involved if you decide to take on the CRA — and that’s without even going to court.

Prior to March 13, 2020, I had never worked from home; I went to my office in a downtown Toronto office tower five days per week unless I was travelling. That all changed, of course, when COVID-19 hit and we were forced to work full time from home from March 2020 until the summer of 2022, when we had a partial return to the office, which exists to this day.

On my 2020 tax return, for the first time in my career, I deducted some home-office expenses using the detailed method. Under this method, which I continued to use in 2021, I added up my home expenses, including electricity, gas and internet, and then deducted a small portion of them — 6.52 per cent, to be exact — representing the approximate square footage of a spare bedroom, which I use exclusively for work when working from home, divided by the total square footage of my home.

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In October 2022, I received a four-page, single-spaced “review letter” from the CRA asking for more information about various items on my return, including my claim for charitable donations and supporting evidence of my work-from-home employment expenses.

For the charitable donations, the CRA requested copies of all my official donation receipts. This was easy for me as I keep them in a file. I simply scanned them and sent them along to the CRA for review.

But things were a bit more complicated when justifying my work-from-home expenses since the CRA requested a copy of my signed T2200, Declaration of Conditions of Employment, and a “detailed breakdown of the amount claimed and the supporting documents.” It also asked for a copy of my T777, Statement of Employment Expenses, and a breakdown of how I calculated the percentage of the expenses I could deduct, as well as “a copy of the floor plan of the residence with the home office.”

I didn’t have a copy of my home floor plan, but I felt that I was pretty conservative with my estimate, claiming only 6.52 per cent of my total home expenses for the use of my home office. I prepared a detailed schedule of my monthly expenses, complete with dates and amounts, using downloaded information from my online banking. I also sent them detailed monthly statements for all the utilities.

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And then I waited … and waited … and waited.

Finally, on June 29, 2023, nearly eight months after I sent the CRA the information it required, it wrote to me a second time to say that it accepted my donation claim, but was reducing my work-from-home expenses by $231, which represented a denial of the 6.52 per cent of my internet expenses. The agency said that because “your internet service is bundled with your TV, we are unable to allocation (sic) the corresponding amount since amount for TV is not eligible.”

This letter was followed up with a notice of reassessment, charging me an extra $124 of tax ($231 times 53.53 per cent), plus $10 of arrears interest. Naturally, I paid this amount immediately to stop the interest clock from running during my dispute, but filed a notice of objection.

In my objection, I noted that I regularly appear as a guest on BNN Bloomberg to discuss tax matters and have a television in my home office set to BNN to keep track of what’s going on throughout the business day. In my pre-pandemic downtown office, I had a TV on my office wall tuned to BNN all day. I sent the CRA a picture of my home office with the TV on in the background.

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And then I waited again.

A couple of months later, in September 2023, I went to My Account online, where I discovered that after an initial screening, my objection was determined to have “a medium level of complexity.” The agency went on to say that its goal “is to resolve medium-complexity objections within 365 calendar days of the date they are sent to the CRA.”

This was clearly not going to be resolved anytime soon. But I was patient. After all, if I was successful, the CRA would pay me refund interest on the tax under dispute at the prescribed rate of seven per cent, which is better than the rate on any short-term high-interest savings account.

Finally, on June 28, 2024, I received a call from a CRA appeals officer willing to negotiate a deal. She had done some independent internet research and found that the corresponding cable package for internet only, without cable TV, was $99.99 per month plus 13 per cent HST, for a total annual cost of $1,355.88. Based on my employment use of home at 6.52 per cent, the CRA was prepared to allow a deduction of $88.40. It still maintained that the cost of the cable TV was non-deductible.

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Rather than fight further, I conceded to settle, and on July 25, 2024, I received my new 2021 Notice of Reassessment showing a tax refund of $47.10.

And it came with $8.14 of interest.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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