Business Expenses for Real Estate Agents
Following the Bank of Canada’s decision to continually raise interest rates in 2022, real estate activity has been muted, with fewer homes changing hands and entering the market for sale. Business expenses for real estate agents are changing. Given that there are over 155,000 real estate brokers, agents, and salespeople in Canada (according to the Canadian Real Estate Association), now might be a good time to share a tax tip that will benefit those real estate agents.
On the Government of Canada’s website, the Canada Revenue Agency (“CRA”) has written about some of the more common expenses a self-employed person may have. These publications can be found here. However, it’s important to know what facts and circumstances make certain payments business expenses and, therefore, tax-deductible.
What Is a Deductible Business Expense for Real Estate Agents?
A payment is generally deductible if it is made to gain or produce income from a business, is not on account of capital, is not a personal expense, and is reasonable in the circumstances. So, in addition to all the usual costs, like advertising and promotions, meals, vehicle expenses, monthly brokerage fees, and TREB/RECO/OREA/CREA dues, the cost of gifts or cash that a real estate agent gives to buyers may be deductible as a general business expense if these conditions are met.
For meals, vehicle expenses, and gifts, a real estate agent should keep detailed logs. These are required during any audit and are used to justify the expenses claimed.
If a real estate agent gives a gift or a rebate to someone who used their services, if they can show that the rebates in the form of gifts or cash were offered for the purpose of gaining or producing income from her business (for example, to increase sales), then the rebates are likely deductible in calculating income. Realtors must keep the GST/HST collected on the full commission and only provide the rebate after the GST/HST has been deducted.
What Is Not a Deductible Business Expense for Real Estate Agents?
Depending on the circumstances, an amount paid to a non-length arm’s purchaser, such as a family member of the real estate agent, would most likely not be deductible. Such an expenditure by a real estate agent could be considered a personal expense, the deduction of which is expressly prohibited by paragraph 18(1)(h) of the Income Tax Act (“ITA”).
Additionally, golf expenses are expressly mentioned by the ITA as business expenses that cannot be deducted.
There are some business expenses for real estate agents that may be deductible, and may not be deductible. Keeping good records is key in being able to justify to the CRA why your business expense is not personal, and should be allowed as a deduction. If the expense is a personal expense, and does not further a real estate agents business, then it is not a deductible expense.
What if a Real Estate Agent gives a Rebate or Gift to a Purchaser?
The CRA explained in the Canadian Tax Interpretations and Transactional Implications (which can be found here) that the following tax treatments would apply to properties sold by a real estate agent:
- In most cases, a rebate will reduce the capital cost of a property used to generate income through a business, rental property, office, or job.
- If the property is used for personal reasons, like as the buyer’s principal residence, the buyer usually doesn’t have to pay any taxes on it.
The real estate agent is not required to provide tax receipts to purchasers when issuing information slips for such rebates because there is no reporting requirement with respect to such income.If you keep careful records of your expenses and hire a tax professional who takes the time to claim all of your deductions, you can save a lot on taxes and get more money back from each hard-earned commission check.
Please keep in mind that CRA interpretations are not binding on themselves, so they may make contrary decisions to something they have previously provided an interpretation on.
If you are a real estate agent and would like to discuss the tax implications of deducting certain payments as business expenses for real estate agents, give us a call today! We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.