Most realtors in Canada are incorporated as their own personal real estate corporation with their name, and the majority of them have been at it long enough to know what that entitles them to do as regards taxes, write-offs, expenses and the like. As is the case these days, however, more and more real estate agents than ever are being licensed in Canada and those who are newer to the business may not be entirely up to speed on what they can and can not claim or file for at the end of the year.
Here at Real Estate Leads, our online real estate lead generation system is an effective way for new realtors to get more leads in their city or town. It’s been especially well received over the last few years, and we’re very happy to make such a valuable resource available to realtors – new, well established, and everywhere in between! A part of what we like to do as well is share insight into what it takes to be a successful realtor in Canada, and as such this week’s post should be plenty informative for many of you.
Let’s start with some helpful tax tips, and move forward from there.
General Tax Tips for Canadian Realtors
The first piece of advice is that you should meet with an accounting professional before starting your business, so that you can know what to look out for. He or she will be able to answer all of your basic questions – should you keep receipts? For how long? Which ones? You’ll find the majority of your questions can be answered in a one hour consultation
- Stay organized. Far too many realtors are constantly missing documents, are unable to accurately tally up all of their expenses, and / or have trouble providing evidence of their claims when they need to. Start on top of this stuff, and it’ll be easier to stay on top of it all the time.
- Create a system to separate your various expenses into different categories (and then be diligent about inputting the data into a spreadsheet. By doing more up front, t will be easier at year-end. Tracking your expenses with an online tool such as Wave Accounting, Xero Online Accounting Software, or Freshbooks is highly recommended and very easy for nearly anyone, even if you’re not digitally savvy or good with numbers! Plus, 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 and this may be significantly to your advantage.
- Keep records of all GST/HST collected. A good tip is to tuck away all of the GST/HST you collect on each commission cheque to ensure you have enough funds to send along to the CRA when tax time rolls around. You may owe less GST/HST at the end of the year, and if so consider any amount not remitted to the CRA as a bonus! Unfortunately, many agents spend the GST/HST they collected throughout the year, and this of course leads to lots of interest being accrued and penalty charges being added when they end up settling up with the CRA past the deadline.
- 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, and allows the CRA to differentiate if you were ever chosen for an audit.
Tax Deductions and Write Offs
We’ll start by saying that these are not ALL of the deductions and write offs you may be eligible to claim (doing your own research is recommended), but in the interest of keeping this blog post short and approachable will look at the most prominent ones.
Commission Rebates:
We’ve all seen real estate prices in Canada (Vancouver and Toronto most specifically) go through the roof, and as a result clients on both the buyer and seller side are frequently asking their realtor for a reduction on their commission. This is typically done to either help with closing costs, renovations, or to reduce their mortgage balance after the sale has closed. Keep in mind that commission rebates are 100% tax deductible to the realtor. Remember though that you must keep the GST/HST collected on the full commission, and only provide a rebate that is the net of that GST/HST figure.
When a property is purchased/sold as a principal residence, the benefactor will have nothing to worry about. If the property is purchased or sold as an investment property, however, this rebate will have tax implications that are, unfortunately, beyond the scope of this article – click here to learn more – but long story short, it will result in an increase to the capital gain on the property – provided there is one, of course.
Real Estate Courses Tuition:
You’ve got a pair of options with how you want to approach these ones:
- Including your tuition expense as a tuition credit on your personal tax return (Schedule 11 if you need to know). This is a tax credit and not an expense credit, and while it may result in tax savings it doesn’t benefit the taxpayer as much as a direct expense would. For most it will be included on the business income and expense schedule (Schedule T2125 – Statement of Business Activities) on your personal tax return.
- Filing your tuition expense as an actual expense on your personal tax return (Schedule T2125). Once you’re working as an active realtor, your Schedule T2125 in your personal tax return will be used to report the entirety of your commission income and expenses to the CRA. The benefit to the taxpayer is much greater than in scenario #1 above when an expense is included in this schedule. The reason being is that it’s a full expense, deduction and write off for Real Estate Agents against their commission income. Naturally, most choose this option.
So, prior to registering as a real estate agent with a brokerage, your tuition courses should be recorded as a tuition credit. After registering with your local REB and incorporating yourself, your tuition expenses should be included on Schedule T2125 to allow you to receive the full deduction.
Some may ask why this is necessary. Well, 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 an agent yet, they may have issues with it. As an operating business, you can deduct any expense that helps you generate income, and courses are indeed included within that. Keep in mind though that many of you wouldn’t even have known whether you’d get through all of the courses and whether you’d even become registered with a brokerage as a real estate agent. The CRA may take issue with the fact that you’re trying to deduct expenses, and especially so if doing so prior to establishing a business.
GST/HST on Vehicle Purchases:
Tracking the GST/HST you expend on your real estate business activities and expenses can add up to considerable tax savings, and everyone will like the sound of that. As you may or may not know,any GST/HST you collect minus any GST/HST you spend has to be remitted to the CRA. Therefore, the more you spend in GST/HST for your business, the less you will be obligated to remit to the CRA. These same GST/HST rules aren’t nearly as straightforward when the purchase is related to an item that isn’t used EXCLUSIVELY for that business. The GST/HST a buyers spends on a vehicle purchase is usually significant, so it is important that you understand in full what you’re entitled to claim.
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% of the time or more for business purposes. Conversely, it will disallow any GST/HST on filing if the vehicle is used for business 10% or less of the time. If your usage is somewhere in between, a formula can be followed to arrive at the GST/HST amount you are eligible to claim for a business vehicle. Far too many agents fail to make the calculations correctly and miss out on these valuable deductions. Speak to a tax professional if you need to!
Other Major Considerations:
- If in any year you owed $3,000 or more in GST/HST, you are obligated to pay quarterly GST/HST instalments for the subsequent year (equivalent to your GST/HST payable amount in the prior year divided by 4). Not paying will put you in a position where you have to pay interest until this amount is recouped by the CRA.
- 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 must remit will be equal to 8.8% of your sales
– and in some cases that’s a beneficial tax scenario for a realtor!
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