Tax Deductions, Write-offs, Expenses and Tax Tips for Real Estate Agents in Canada

If you are a Real Estate Agent in Canada, you should read this to save Tax and HST!  

Real Estate

The following is post from Lior Zehtser, CPA, CA, co-founder and partner of ConnectCPA, Chartered Accountants – a virtual accounting firm that leverages technology to bring simplicity to the lives of business owners.

You won’t find many Chartered Accountants who felt the need to study another discipline after all was said and done with their articling and studies.  Getting through the Canadian Chartered Accounting exams is a rigorous process and looking at another textbook and studying for another exam is probably the last thing an accountant would want to do.  Thinking back to it, I don’t know why I went for it, but my passion for real estate led me down the Real Estate Agent path and I’m happy it did.

As co-founder of a Chartered Accounting firm, my priorities lie with my accounting clients - but when I hear about a unique property or when I have some spare time to browse MLS, it is sometimes hard to resist and I have to investigate further.

As a designated Chartered Accountant in Canada and Licensed Real Estate Agent in Ontario, I have a unique perspective when it comes to tax deductions and write-offs for Realtors, since I prepare my own taxes for my Real Estate activities.  It’s not often your accountant has similar experiences to you, which explains why our Real Estate Agent clientele tends to double every tax season.

But enough about me…let’s get to the reason why you’re here:  You want to keep the Canada Revenue Agency (CRA) outta your pockets and bank account.  You can do so by following some of the tips listed below.  If you need additional information, I’m always happy to help (Lior@ConnectCPA.ca).

Some important General Tax Tips:

-  Meet with an accounting professional right before you start your Real Estate career so that you know what to look out for.  Should you keep receipts? For how long? And which ones?  Most of your questions can be answered in a one hour consultation.

-  Stay organized.  This seems like a simple task, yet every year I meet with many Real Estate Agents and Brokers who are missing documents, can’t confidently tally all of their expenses, and have trouble providing evidence of their claims.  Create a system – whether it’s a monthly/quarterly exercise to separate your various expenses into different categories (envelopes, folders, etc.) or inputting the data into a spreadsheet.  The more you do upfront, the easier it will be at year-end.  Think about tracking your expenses with an online tool such as Wave Accounting, Xero Online Accounting Software , or Freshbooks - ask us how!  In addition to saving you time during tax season, if you are ever chosen for an audit, the CRA agent may be impressed with how quickly you were able to supply the requested documents, which may play into your favour.

-  Don’t forget about the GST/HST you collected - this doesn’t belong to you!  It would be prudent to tuck away all of the GST/HST you collect on each commission cheque to ensure you have enough funds to remit to the CRA at tax time.  If you owe less GST/HST at the end of the year, then consider the remaining GST/HST not remitted to the CRA as a bonus.  What I see a lot are agents spending the GST/HST they collected throughout the year leading to lots of interest and penalty charges because they end up paying late.

-  Set up a separate business bank account which acts as the main account for your commission income and expenses.  This helps to differentiate between business and personal expenses, but more importantly, does not open the door for the CRA to review all of your personal activities if you were ever chosen for an audit.

Tax Deductions & Write-Offs:

With a quick Google search or talking to some experienced Real Estate Agents, you can probably get a sense of the type of expenses that are commonly deductible.  In addition to all of the standard expenses (Advertising & Promotions, Meals, Monthly Brokerage Fees, TREB/RECO/OREA/CREA dues, etc.), I thought I would pick a few deductions that I get questioned about the most:

Commission Rebates:  With real estate prices in Canada (and more specifically Vancouver and Toronto) through the roof, clients on both the buy and sell side frequently ask their Realtor for a break on their commission - to either help with closing costs, possible renovations, or to reduce their mortgage balance after closing.  Commission Rebates are 100% deductible to the Real Estate Agent.  Realtors must remember that they must keep the GST/HST they collected on the full commission and only provide the rebate, net of GST/HST.

If the property purchased/sold is a principal residence, the benefactor has nothing to worry about.  If the property purchased/sold is an investment property, this rebate has tax implications and is beyond the scope of this article - but to make a long story short, it will increase the capital gain (if any) on the property.

Real Estate Tuition Courses:  There's two different positions someone can take here:

  1. You can include your tuition expense as a tuition credit on your personal tax return (Schedule 11, to be more specific). This is a tax credit, rather than an expense, and although it may result in tax savings, it doesn't benefit the taxpayer as much as a direct expense would, had it been included on the business income and expense schedule (Schedule T2125 - Statement of Business Activities) on your personal tax return.
  2. You can include your tuition expense as an actual Expense on your personal tax return (Schedule T2125, to be more specific).  Once you're an active realtor, Schedule T2125 in your personal tax return will be used to report all of your Commission Income and Expenses to the CRA.  When an expense is included in this schedule, the benefit to the taxpayer is much greater than in scenario #1 above, since it's a full expense, deduction and write off for Real Estate Agents against their commission income

What should you do?  Prior to registering as a Real Estate Agent with a brokerage, your tuition courses should be recorded as a tuition credit.  After registering, you're in business, and your tuition expenses should be included on Schedule T2125, so that you can receive the full deduction.

Why? If your tax return is audited by the CRA and you included your tuition expenses as expenses, rather than credits, and you haven't registered as a Real Estate Agent yet, they may have issues with it.  As a business, you can deduct any expense that helps you generate income, courses being one of them.  That being said, early on in your studies, you don't know whether you'll get through all of the courses and whether you'll even get to the point of registering with a brokerage as a Real Estate Agent.  CRA may find issue with the fact that you're trying to deduct expenses, prior to establishing a business.   

GST/HST on Vehicle Purchase:  Tracking the GST/HST you incur on your Real Estate activities and expenses can add up to significant tax savings.  As you may or may not know, any GST/HST you collect less any GST/HST you spend has to be remitted to the CRA.  Therefore, the more you spend in GST/HST for business, the less you will remit to the CRA.  Unfortunately, the GST/HST rules aren’t as straightforward when the purchase in question relates to an item that isn’t wholly used for business.  And since the GST/HST you spend on vehicle purchases is usually significant, it is important that you get it right.

The CRA will allow you to include all of the GST/HST you incur on a vehicle purchase on your GST/HST filing if the vehicle is used 90% or more for business and will disallow any GST/HST on filing if the vehicle is used 10% or less for business.  If your usage is in between, there is a formula that must be used to arrive at the GST/HST amount you are allowed to claim.  We have seen many Real Estate Agents miss on these deductions, so it is strongly advisable to speak to a tax professional.

Things to Consider:

-  If in any year you owed $3,000 or more in GST/HST, you are required to pay quarterly GST/HST installments in the subsequent year (equivalent to your GST/HST payable amount in the prior year divided by 4).  Not paying instalments means you will have to pay interest.

-  You can stop calculating GST/HST incurred on expenses by opting to remit GST/HST using the Quick Method.  All that is required of you is to calculate the GST/HST you owe by using a simple formula provided by the CRA.  In a nutshell, the GST/HST you will remit is equal to 8.8% of your sales - and in some cases this may be a more favourable tax situation for you.

Please check back often for more Real Estate related tax tips to help you save tax!

Disclaimer: This blog post is for informational purposes only and should not be solely relied on to make tax decisions. Readers are urged to seek professional advice before using this or similar information to make tax decisions.