Tax Tips for Real Estate Agents and Brokers

What are the tax expenses left out by the realtors? 

Many realtors think that incorporating as a Personal Real Estate Corporation (PREC) will give them most of the benefits of incorporating itself. Unfortunately, only wishing about tax planning goals will not work for you; you must work for it. 

In most cases, realtors don’t have a clear understanding of how the tax planning works in the corporation and what are the main deductions/expenses allowed. If audited by the CRA, what documents do they need to defend themselves?

In this article, we will focus on the expenses that real estate professionals can deduct legally. This is equally applicable for realtors working as self-employed or incorporated (PREC). Honestly speaking, the things we are going to discuss are not big secrets. One would expect all real estate professionals to understand them, but in reality, we get surprised by the questions we receive from our clients. Gaining some understanding of the tax system will help realtors a great deal. 

Why expenses are missed out:

First, let’s see why these expenses are missed out. 

1. Missing bookkeeping. The main reason we find is deferring the bookkeeping till the year-end; typically, till March or April next year when meeting the accountants for tax filing. It is too late! For sure, you will miss expenses or forget the personal portion or business ratio. Remember, bookkeeping is a daily function, not a year-end ritual. 

2. Stay organized and create a timely backup. It is a simple task, but perhaps a very difficult task. All it takes is to take a picture of each receipt and save it on your computer when you purchase something. Often, we meet a real estate agent or broker who is missing documents, can’t confidently list their exact expenses, or have difficulty in producing evidence of the expenses. 

3. A mix of business and personal expenses: it is highly recommended to keep business and personal accounts separate. If you are using the same bank account or credit card for business, it will be difficult to correctly classify your expenses unless you are very strong in your bookkeeping and documenting each transaction. 

The general rule for expense allowability: 

The next question most real estate agents and most brokers ask is what expense can I deduct? Let’s see the general rule before we discuss specific deductions. 

1. The Income Tax Act allows you to deduct all reasonable expenses that you incur to earn business income, of course, with certain exceptions. This simply means that if you can establish that you incur an expense for generating the income, you can deduct it. 

2. Bank and credit card statements are NOT sufficient to support your deduction if the CRA ever audits you.Typically, if there is no receipt, there’s no deduction. Take a picture of the receipt and store it on a computer if you prefer not to keep paper.

If you understand the above two points, you know the main part!

Main deductions allowed: 

Now let us discuss the deductions/expenses allowed for realtors and brokers.

1. Advertising and promotion: 

These include all expenses incurred for the promotion of your business and may include charges for printing and designing your flyer, card, and other promotional material. It also includes stagging costs, costs related to open house, cost of a person hired to clean or paint the house, etc. 

2. Meal & entertainment

Meal and entertainment for clients are an essential part of the real estate industry and most client-facing jobs. The CRA also recognizes this and allows a deduction of 50% of the expense related to meals and entertainment. Take a picture of the receipts, and as a good practice, note the name of the client. In case of an audit, the CRA will not only ask for a receipt but will also ask the name of the client you were with. 

3. Broker charges are fully deductible expenses:

These may include desk fees, transaction charges, split commission, office admin fees, etc. The broker issues T4A slips reporting your income from the brokerage. Some brokers report income on a gross basis (before deduction of their share), and some report on a net basis. It is very important to carefully reconcile it with the detailed statement issued by your broker, normally called the Tax Worksheet. 

4. Client Rebate: 

It is common for a realtor to share some commission earned with their clients/friends to promote the business. It is a tax-deductible expense. However, this needs to be backed by strong documentation. If this is done through the brokerage, it is easy, as the broker will maintain adequate documents. But if you do it yourself, you must have enough supporting documents to support your claim. At least make a payment through a cheque and ensure to mention the property details. Also, keep a copy of the cancelled cheque. 

5. Website, software-related expenses 

Expenses incurred for development, designing, promotion/SEO, and other related expenses are fully deductible. Similarly, other expenses such as lead generation, clients list, etc. are also legitimate expenses. 

6. Professional liability insurance and general liability insurance

Professional liability insurance, required for the Toronto Real Estate Board (TERB) / Real Estate Council of Ontario (RECO), is a deductible expense. Similarly, if you maintain general insurance for your business or office, it is also a deductible expense. 

7. Sub-contractor or employee

if you hired someone to help you, these expenses are 100% tax-deductible. However, you must carefully assess whether you are hiring an “employee” or a “contractor”. Legal, tax, and procedural requirements are quite different in both cases. 

8. Professional membership, license, and legal fees

 Membership fees paid to the Toronto Real Estate Board (TERB) / Real Estate Council of Ontario (RECO) to maintain status as a realtor are also a legal expense and fully deductible. 

9. Coaching, training, and conferences

Many real estate professionals use the services of professional coaches to groom their business skills. These expenses are fully allowed and deductible. Moreover, if you attend a conference related to the business, you can deduct up to two such conferences per year if you are operating as a sole proprietor. In the case of the corporation, there is no cap on the conference you can attend in a year. 

10. Motor Vehicle Expense:

As traveling is an essential part of the real estate business, motor vehicle expense is one of the important expenses. If you have used a vehicle, you can claim expense related to it, such as:-

• License and registration fees;
• Fuel/oil costs;
• Insurance;
• Money borrowed to buy a motor vehicle;
• Maintenance and repairs;
• Leasing costs; and
• Capital Cost Allowance (depreciation)

But if you have used the vehicle for both personal and business uses, you can only deduct the portion of the expenses that are directly related to using the vehicle for earning income. To support the amount you deduct, keep a record of both the total kilometers you drive and the kilometers you drive to earn income.

Other deductible expenses are listed here:-

1. Professional, legal & accounting fees
2. Office rent
3. Office supplies & expenses 
4. Equipment used for business such as laptops, desktops, etc. 
5. Repair and maintenance 
6. Telephone & communication 
7. Travel expenses 
8. Bank service charges 
9. Interest on loans & finance obtained for business purposes 
10. Client’s gift/gift card
11. Home office-related expense

GST/HST reconciliation: 

It is very tempting to feel that the GST/HST you collected is yours. But the fact is that this doesn’t belong to you! Very often we meet realtors who have already consumed the GST/HST collected and then they struggle to make payment of the GST/HST. This leads to lots of interest and penalty charges because they end up paying late. 

Prudently track the GST/HST that you collect, it is payable to the CRA. Of course, equally important is to track the GHS/HST you paid on your purchase (but only related to the business). You will get a refund of the GST/HST you paid or will be adjusted against the GST/HST payable to the CRA. 

Conclusion:

The above is the list of expenses that apply to most realtors and brokers, but there are various exceptions, and every case is different. However, if you understand the general deductible principle discussed above, you are very close to the finish line. 

It is important to do timely bookkeeping and consult with your accountant on an ongoing basis. The right professional advice can save you a lot of dollars in taxes and compliance. Source Accounting team is ready and happy to help you in this journey. 

If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting Professional Corporation (CPA). Source Accounting is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. We serve clients from Mississauga, Toronto, Brampton, Milton, Hamilton, Oakville, and across GTA. And if you find this post helpful, please let us know in your comments.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.