Top Tax Tips for Realtors
“What are some of the Top Realtor Tax Deduction Tips?”, is one of the most commonly asked questions I get.
A while ago I was a guest on a TREBB (Toronto Regional Real Estate Board) podcast called “Ready to Real Estate”, where I shared some of the top tax tips realtors shouldn’t miss.
You can also listen to my podcast here.
Biggest tax deduction tip that realtors often miss on
The funny part is that it wasn’t really a big tax deduction tip. Rather, the biggest tip is understanding the general tax deductibility rule.
The Income Tax Act allows you to deduct all reasonable expenses that you incur, for the purpose of earning business income or property income, subject to a bunch of exceptions.
What this means is that, as long as you are able to establish the cause and effect relationship that there is a reason for incurring the expense to earn the income, then you might have a chance to get a deduction.
This applies to all your business expenses, from advertising, website, paid Facebook ad, RECO insurance, board membership fees, desk fees, staging costs, signage, automobile, accounting fees, assistant fees, etc. all tax deductible.
To find out more about realtor tax deductions, you can refer to this video and post that I did – Top ten tax deductions you shouldn’t miss as a realtor,
Understanding the general deductibility rule is a good start, as a real estate agent, you’re also required to keep all your receipts to support your deduction.
For instance, if you take your clients out for a meal and eat out, you should keep the receipt. Why, you ask? Because, if there are no receipts, there’s no deduction. If you ever get audited and you are claiming a deduction on something that you are missing a receipt on, unfortunately, you will get this disallowed.
Little did many Canadian real estate agents know, bank statements, visa statements, credit card statements in general, they’re not sufficient support for your deduction of an expense. Whether you have truly incurred the expense or not, those are not sufficient documents in the eyes of CRA.
Let’s say you take a client out and paid for the $200 bill using a credit card. The $200 transaction shown on your visa statement would not qualify as enough evidence to support your claim. You would need to keep the original invoice, the one that shows the breakdown of the meal, and the credit card receipt, the one that shows the tip you pay. You actually need to prove who went there and what kind of food was ordered, or the type of drinks that you were ordered. You would also need to write down the name of your client on the receipt.
Keep the receipts, even if not all of them are 100% tax deductible. You can even take a picture of the receipts and store them as a soft copy on your phones or laptops, if you prefer not to store all the paper copies.
Now, these are the three golden rules and one of the biggest realtor tax deduction tip, a realtor often misses:
- You are eligible to deduct all reasonable expenses that you incur for the purpose of earning your business income, so long as you can establish cause and effect relationship between incurring the expenses and earning your income;
- Keep the receipts and proper documentation to prove the cause and effect relationship; and
- Bank statements and credit card statements are NOT sufficient to support your deduction if CRA ever audits you.
Top Tax Saving Strategy for Realtors, Real Estate Agents and Teams
The biggest tax deferral strategy we have done for realtors is setting up a personal real estate corporation.
I’ve seen our clients saving tens of thousands of dollars by operating their businesses from a PREC. I’ve also seen them using the excess cash available in the corporation to invest in more properties and reinvest in their businesses.
Every realtor, real estate agent or brokers’ situation is different. The decision to decide whether a PREC is for you or not is not only in one’s business, but in fact more about their personal spending.
For real estate agents who are full time in the business, we need to look at how much they normally net, after paying for all the business expenses. We compared that amount to how much they need for their personal needs, so that we can decide whether corporations are suitable for their needs.
For realtors who are working part time in the business while having a full-time job, again, we need to look at the base salary from employment, together with the amount they need for their personal need, to determine whether a PREC would be beneficial.
Again, everyone’s situation is different but guess what, Personal Real Estate Corporation can potentially defer tons of taxes.
We’ve covered quite a bit at the Toronto Region Real Estate Board podcast. Make sure you listen to it to discover the many tax tips I have disclosed.
Until next time, keep crushing it.
Cherry Chan, CPA, CA
Canadian Real Estate Agent Accountant
4 Deciding Factors to Help You Choose Between Paying Yourself a Salary or Dividend from PREC
Have you, as a realtor or real estate agent, found yourself with the question, “Should I pay myself a salary or dividend from PREC?”
Well, you’re not alone. Many of my realtor clients have been asking which one is better suited to them. Although it’s not a simple one-answer-fits-all kind of question, I may be able to simplify your situation for you with these 4 deciding factors!
Now that you set up your PREC, should you pay yourself a salary or a dividend from PREC?
As we all know, Personal Real Estate Corporation is considered a separate legal entity. PREC can own assets, buy real estate, owe liabilities, sign contracts, etc. PREC is essentially a legal person.
This also means that the PREC must file its own tax returns.
It also means that, when you, as the owner of the corporation, draw money out from the corporation, there can be tax impact.
There are three ways to draw out money from your personal real estate corporation
- Repayment of shareholder loan
- Salary
- Dividend
Repayment of shareholder loan
When you first start your personal real estate corporation, you would have lent some money into the corporation to get it started.
This can include a direct deposit of funds to your corporation bank account to cover the initial expense before the first paycheck comes in.
This can also include payment of incorporation fees, etc. that you pay personally on behalf of the corporation to get your PREC going.
As a result of these advanced payments, your personal real estate corporation may owe you money.
Your PREC can repay you, the shareholder, the amount that you have invested into the corporation, tax-free withdrawal from your personal name.
When you own your real estate agent business inside a corporation, there’s always a tax impact when you take the money out from the corporation.
There are two common ways to do so – one is by way of salary and the other is dividend.
Salary vs. Dividend and PREC
What’s the difference between the two of them?
- Salary is a deductible expense in a PREC and a dividend is not
Let’s use an example to illustrate. Say a personal real estate corp makes $400,000 before paying a salary.
Say the corporation pays $100,000 to the shareholder as a salary, the corporation is taxed on $300,000 at 12.2%. The individual who receives the salary will then pay tax on the $100,000.
You, the realtor, will be paying personal taxes on the $100K salary.
Now, if the corporation decides to pay the dividend instead, the corporation would first get taxed for $400,000 at 12.2%. The individual then receives the $100,000 as dividend.
The realtor pays a lower tax amount on the $100K dividend received, as the corporation already pays 12.2%.
In a nutshell, there’s no difference in terms of the tax paid.
Personal tax on salary would more or less equal the combined corporation tax and personal tax on the dividend of the same amount. That’s called tax integration. This is how the Canadian tax system is designed.
- There’s an additional cost involved, such as CPP when you pay a salary
When paying a salary, the PREC is required to withhold taxes, employee’s portion of Canada Pension Plan and pay the net remaining amount to you, the employee realtor.
Personal Real Estate Corporation, the employer, in this case, the corporation, is also required to make the same amount of contribution to CPP.
Personal Real Estate Corp is then required to remit the withholding taxes, employee and employer portion of CPP on a monthly basis to CRA.
Maximum CPP contribution required in 2022 is $3,500 for employer and employee. This means that you will incur a total of $7,000 extra cost when you pay yourself a salary.
At the end of the year, you also have to reconcile with CRA by filing a T4 information return.
By paying yourself a salary, you get to contribute to your CPP. If you continue to contribute to CPP, when you reach the age of retirement, you can be eligible to receive your CPP.
Amount of CPP you receive when you retire will be based on the amount of CPP you have contributed.
- Salary can give you RRSP contribution room & enable you to deduct child care expense
Although the costs seem to be higher with salary, there are some other benefits from paying a salary, for example, RRSP contribution.
Canadians are only allowed to make RRSP Contribution up to the RRSP contribution limit. RRSP contribution limit is calculated as a percentage based on earned income. Salary is earned income but dividend isn’t. If you want to save money in your RRSP account, paying yourself via dividend won’t work.
Salary creates a bigger RRSP contribution limit. Dividend doesn’t. You can still contribute based on the unused RRSP contribution limit carryforward from prior years. But once that contribution limit is used up and you are not creating extra contribution room with dividend, you will no longer be able to contribute to your RRSP.
If you have childcare expenses, you can deduct the childcare expenses against salary, but not dividend.
Dividend income is not part of the definition of earned income but salary is. In another word, if you make $100,000 dividend income, you’re the lower income spouse and you also incur $8,000 of childcare expenses, you will NOT be able to deduct the $8,000 expense in your personal tax return.
Have a proper consultation with a professional accountant that understands your tax picture.
- You are entitled to an additional employment amount (as a personal tax credit) if you are paid a salary
When you earn a salary, you get another $1,257 employment amount as non-refundable personal tax credit in 2021.
Calculated on the base personal tax rate, this is equivalent to $1,245 x 15% = $189 (in 2021) non-refundable tax credit.
Unfortunately, this isn’t available when you earn dividend income. Self-employed individuals are not eligible to claim this amount unfortunately.
Now, it is not a simple black or white kind of answer, is it?
If I were you, I’d speak to a professional accountant that knows my personal situation before deciding. And, I wouldn’t forget to consider all of the above when making my decisionQ
Feel free to reach out here and book a consultation. We’ll be happy to help you decide if you should go ahead with paying yourself a salary or dividend from your PREC.
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
How to Prepare for the Rising Interest Rate
As realtors, any fluctuation with the Interest Rate can seem very worrisome, wouldn’t you agree? Let’s begin with looking at the the recent realtionship between the ineterest rate and our government.
Rising Interest Rate & Canadian Government
In the past two years, the Canadian government has done two things to help fellow Canadians get through the pandemic.
- Lots of subsidies, grants, and benefits were offered to local businesses and fellow Canadians.
- Canadian interest rates had been lowered to the historic level at 0.25% to stimulate borrowing and investing.
Our government has been incurring a substantial amount of deficit year in and year out before the pandemic emergency relief measures. With the unprecedented amount of benefits and subsidies offered during the pandemic, the Federal government had increased their deficit by twelvefold, by $274.4billion in 2020.
If you combined the Federal government deficit with the provincial, territorial and local governments, the consolidated deficit was $325.5 billion for 2020.
Have you wondered how the Canadian government can afford to have this much deficit in one year?
The simple answer is that – they don’t, they borrowed. They borrowed from the Bank of Canada. They borrowed A LOT from the Bank of Canada.
The BOC, the Central Bank of Canada, purchased bonds, treasury bills, etc. from the Government of Canada. It then turned around and offered a portion of them to the private market including banks and security traders. The BOC kept the remaining portion without offering it to the public.
Because Bank of Canada is wholly owned by the Government of Canada, for those of you who know accounting, the portion that’s kept by BOC is essentially a digital entry that’s created to increase cash, i.e. asset, and increase liability.
This is how they increase money supply in the system, a simple journal entry in accounting term – by debiting cash, crediting liability.
Because of the amount of subsidies and grants offered by the government during the pandemic, we created an unprecedented amount of debt in 2020.
Cumulatively, our total government debt had grown to $2,852 billion as of 2020.
With an increase in money supply over the last two years, as well as low interest rates offered by the Bank of Canada, it isn’t surprising to see that inflation surpassed 5% in January 2022.
As realtors and real estate agents, you have all seen and experienced the unhinged real estate market, partly stimulated by cheap money being offered by banks.
One of the ways that the BOC could limit inflation AND control the overheated housing market was by increasing the prime rate.
And, so they did. They announced a rate hike of 0.25% at the beginning of March, and now they have raised it last week by half a percentage point to one percent last Wednesday in its latest move to rein in high inflation.
Now you may be wondering…
Can we expect to see more hikes?
We all knew that this was coming. We just didn’t know how much increase we would see over the next year or so.
The good news is that the gradual increase in interest rates over the year to help slow inflation does not mean buyers will stop seeking a home completely.
Together with the Federal government’s decision to ban foreign investors for the next two years, there will definitely be fewer bidding wars for home buyers to be in the middle of, maybe we can even see some rare stability in the market.
We may even see some price adjustments similar to the year 2017/2018.
You’ll be surprised how many realtors / real estate agents often ask me… as a buyer, should I go with a fixed-rate or variable rate mortgage in this fluctuating market?
Locking in with a Fixed interest rate mortgage
With a fixed-rate mortgage, your interest rate and payment stay the same over the mortgage term. A fixed-rate mortgage is tied to bond rate, not Bank of Canada prime rate.
With a variable-rate mortgage, the interest rate can move up or down according to the lender’s prime interest rate, which is also tied to the Bank of Canada prime rate.
With a variable rate mortgage:
- Your initial interest rate will most likely be lower than a fixed-rate mortgage
- If the prime rate falls and your interest rate falls accordingly, your monthly mortgage payments decrease (vice versa, as the prime interest rate has increased and is expected to continue to increase). If the prime rate rises and your interest rate goes up accordingly, your monthly mortgage payments increase accordingly as well..
- You can convert to a fixed-rate mortgage at any time (especially when you know there’s going to be an expected hike in interest rates)
What this means with a fixed-rate mortgage:
- From my experience, you can expect the initial interest rate to be higher than a variable-rate mortgage.
- You’ll know when you’ll be able to pay-off your mortgage, as the interest stays the same
- You’ll have the certainty to budget for mortgage payments, knowing exactly what you have to pay each month for the duration of the term
- Mortgage penalties can be substantial if you choose to break before the end of the term
The biggest downside of locking in a fixed-rate mortgage is the cost of penalty. Penalty is often calculated as greater of
- 3 months of interest or
- Interest rate differential between your existing mortgage or their advertised rate or posted rate
This could easily amount to tens of thousands of dollars in terms of penalty.
When you commit to a fixed-rate mortgage, make sure you are not planning to 1) sell or 2) refinance within the term of your mortgage.
Here’s the little hack that I normally do – commit to variable, pay fixed-rate mortgage amount
If I were to borrow $800K from the bank to purchase a rental property, I would opt for a variable rate.
Variable-rate at 1.60% means that my monthly payment amount = $2,797.46
Fixed-rate at 2.69% means that my monthly payment = $3,234.26
If you want peace of mind, here’s what I would do…
Sign up for a variable rate mortgage, pay your monthly mortgage payment amount to the fixed-rate amount.
In my example earlier, with an $800K mortgage, the bank requires me to pay $2,797.46 if I go variable.
I would instruct the bank to make a fixed-rate mortgage payment of $3,234.26 instead – so I am already used to paying a higher monthly amount.
The extra $437 payment that I make goes toward my outstanding mortgage principal on a monthly basis.
At the end of one year, my mortgage outstanding amount is lowered by $5,306 as compared to opting in for the fixed mortgage.
My cash outflow is exactly the same, but the extra goes straight to my mortgage principal, which also carries a compound effect on my monthly mortgage payment.
By the end of the second year assuming there is no rate increase, my mortgage outstanding is lowered by $10,757 cumulatively.
If you are concerned, go for a variable-rate mortgage, but pay as if you’re committed to a fixed-rate mortgage, assuming you have an option. As you know, sometimes, we don’t have a choice but to commit to a fixed-rate mortgage.
How to Prepare for a higher Interest Rate Environment?
- Invest in cash flow positive properties
If the rental income isn’t enough to cover all expenses on its own, you should think twice before investing in the property. As a minimum, you need to generate enough cash flow from your overall portfolio to support this cash flow negative investment.
With this principle, even if there’s a rate hike, your overall portfolio can still sustain itself, without further cash flow injection from you.
Yes, you can still find cash flow positive properties. After all, you’re a realtor! I’m sure if you look hard enough and be more creative, even in this scarce market, there’s something for you out there.
We bought a couple of properties in 2017/2018 just before the “market downturn”. We bought at the peak that year. I remember questioning why we committed to purchase these properties when they were priced at the top.
Thankfully, they have been cash flowing positive from day 1, even though we bought them at the “peak”.
- Restructuring debt to seek out the lower cost of financing
Never stop finding the lower cost of borrowing.
As we speak, we’re in the middle of refinancing 3 of our investment properties. We just completed one round of refinancing on these properties in early 2021. Now we’re on our way to refinance again.
Instead of paying a blended mortgage payment, line of credit allows us to pay interest only, lowering the monthly debt carrying cost.
If the plan goes well, we’re hoping to switch the B-lender financed properties to line of credit as well. Imagine, switching from a B-lender mortgage to a line of credit with interest only payment. We can easily increase our cash flow by $1,000 per property or more.
We’ll still use the excess cash flow to pay down our debt, but we get to choose the amount we pay.
Even if interest rates go up, we get the flexibility to pay less into our principal payment, maintaining the same level of cash outflow monthly.
Make sure you constantly look out for a lower cost of borrowing to minimize the biggest item in your rental operation.
- Take advantage of the dip
You have probably heard about the quote by Warren Buffet, “be fearful when others are greedy and be greedy when others are fearful.”
When there are multiple hike increases, we expect to see an adjustment in the real estate market. Coupling with the ban on foreign investors for the next two years, I’m definitely expecting to see a dip.
This can be the perfect opportunity for capable investors to enter the market, take advantage of the downturn.
Remember the market downturn in March 2020 when nobody was buying properties? Well, this is your chance to score some hidden gems while you still can! As a realtor, you may even know exactly where to find them.
- Relax, rates will remain low… for a very long time
From the narrative on Statistics Canada’s website regarding 2020’s government debt level, “Our debt charges (the Government of Canada interest expense) remain low despite record debt levels. This is a result of increasing money supply, encouraging lending and investment and keeping short-term interest rates close to zero. This allows our government to finance the unprecedented deficits generated during the pandemic at low cost and to refinance maturing debt at lower rates.”
The flip side of this narrative is that when the Bank of Canada increases its prime rate, coupled with the stop of quantitative easing, means that the government will have to finance their future deficit and refinance their current debt at higher rates.
Remember, when the BOC increases its prime rate, it’s also increasing the interest expense that the Government of Canada is paying.
The Government of Canada has about $2,852 billion of total liabilities as of 2020. A rate change is going to increase the cost of financing, not just for us, but for our government as well.
Yes, the rate is likely going to increase again.
No, Bank of Canada won’t have a substantial increase like back to 23% in the 1980s, or even back to 8% in the 1990s…or else our governments will go broke.
Hope this article helped you understand how the Bank Of Canada’s rising interest rate can help you as a realtor and investor!
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
How Realtors can Calculate Income Tax Payable on Commission Income
PAYABLE ON COMMISSION INCOME
Before you learn how to calculate your income tax, you must first understand how the Canadian tax system works.
The Canadian personal income tax system is a progressive tax system. This means that the more you make, the more you get taxed on.
The chart below shows the marginal tax rates for Canadians residing in Ontario in 2022:
| Income range | Marginal tax rate |
| $0 – $11,141 | 0% |
| $11,141 – $14,398 | 5.05% |
| $14,398 – $46,226 | 20.05% |
| $46,226 – $50,197 | 24.15% |
| $50,197 – $81,411 | 29.65% |
| $81,411 – $92,454 | 31.48% |
| $92,454 – $95,906 | 33.89% |
| $95,906 – $100,392 | 37.91% |
| $100,392 – $150,000 | 43.41% |
| $150,000 – $155,625 | 44.97% |
| $155,625 – $220,000 | 48.35% |
| $220,000 – $221,708 | 49.91% |
| over $221,708 | 53.35% |
Marginal Tax Rates
I have simplified the above chart to summarize all major marginal tax rates. However, there are additional income ranges and marginal tax rates. There are also basic personal tax credits that everyone is entitled to.
The best way to explain this system is to use an example.
In this example, we’ll assume the Realtor earns a net commission income of $80,000. To calculate the tax payable, we have to go through the entire list of marginal tax rates.
Here’s how it works:
Between $0 and $11,141, you get taxed nothing.
Between $11,141 and $14,398, you get taxed at 5.05% Ontario tax rate.
= ($14,398 – $11,141) x 5.05% = $164.48.
Between $14,398 and $46,226 you get taxed at 20.05%.
=($46,226 – $14,398) x 20.05% = $6,381.5
And so on.
We have to go through the above calculation for someone who nets $150K in business income. Then, add them all up in the tax payable column, and we will come up with a total tax payable of $44,642.
See the table below:
However, this person’s overall tax rate is different. Your income is taxed at a different marginal tax rate depending on how much you make.
There are two main concepts here: the average tax rate and marginal tax rates.
Average Tax Rate Vs. Marginal Tax Rate & Income Tax
Average Tax Rate
To calculate the average tax rate, you divide your total tax liability by your taxable income.
For example…
The average tax rate for a single person who makes a taxable income of $150,000 and pays
$44,642 in 2022 in Ontario is:
= 29.76% ($44,642/$150,000).
Marginal tax rate
The marginal tax rate is the tax rate applied to your highest chunk of taxable income.
A Realtor who nets $150,000 commission income may decide to close one extra deal before the end of the year.
Let’s assume the realtor makes $10,000 in commissions.
This additional $10,000 is then taxed at the marginal tax rate of 48.35%.
The realtor’s total overall tax liability = $46,642 + $4,835 = $51,477.
The realtor’s new average tax rate = $51,477/$160,000 = 32.17%.
Yes, an extra deal of $10K will only give you an after-tax pay of 52% – the government keeps $4,835, you keep $5,165.
Essentially, if you net $150K already, you are splitting this extra deal 50/50 with the government.
What if you contribute to your Registered Retirement Saving Plans (RRSPs)?
Similarly, all contributions are considered a tax deduction when you contribute to your Registered Retirement Saving Plans (RRSPs). But, again, this tax deduction gets taken off from your top marginal tax rate.
Say with this new deal; you now net $160,000 commission income. You want to save some taxes by contributing $10,000 to your RRSP.
This $10,000 contribution is coming off the top marginal tax rate. This means you can save $4,835 tax payable.
Why are these two definitions important?
As a Realtor, your net commission income is subject to tax.
From the example earlier, for someone who already nets $150,000 commission income, doing one extra deal and adding an extra commission income of $10,000 results in an additional $4,835 of tax liability.
The marginal tax rate from $155,625K to $220K is 48.35%.
The new tax liability is now $51,477.
The new average tax liability is 31.08%.
You cannot simply take your income tax paid at the end of the year and divide it by how much your net taxable income is to come up with your tax rate. You get taxed more than your average tax rate!
Recognizing the marginal tax rate on the additional commission income allows you to make an informed decision on whether you should set up a Personal Real Estate Corporation or not.
CPP – You Pay Double
Now, on top of the personal income taxes you have to pay, as a self-employed realtor, you’re also required to contribute to the Canada Pension Plan (CPP), similar to all other Canadians.
The only difference is that because you are your own employer, you’re required to contribute to the employee and employer portion of CPP.
CPP is calculated as 5.70% of your net earning with a basic exemption amount of $3,500 in 2022. Both employer and employee are required to contribute 5.70%.
In 2022, self-employed realtors who net more than $64,900 in 2022 are required to contribute a maximum of $3,499.80 as an employee and another $3,499.80 as an employer. That is a combined total of $6,999.60!
What if you incorporate?
Well, this is a topic for another day.
As a minimum, if you incorporate, you can choose not to contribute double amount of CPP by paying yourself a dividend.
As a minimum, you can choose to retain as much profit as possible in the corporation which has a tax rate of 12.2% in Ontario, instead of the 50% that you see above.
If you need help setting up a PREC for income tax purposes, CLICK HERE to book a 30 minute one on one consultation with one of the professional Accountants on my team.
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
Harmonized Sales Tax: Calculate HST with The Quick Method
Harmonized Sales Tax (HST) is a combination of federal and provincial sales taxes on goods and services in Canada.
Last week, we spoke about how realtors could deduct commission rebate, and some of you asked me about calculating your HST in the first place. So let’s get right into it…
As a Realtor, the services you provide to your clients are subject to the Goods and Services Tax (GST) or the Harmonized Sales Taxes (HST) in Ontario.
In Canada, if you make over $30k annually from all your combined commercial activities, you must charge HST to your customers on behalf of CRA. However, CRA considers you a small supplier if you make less than $30k from all of your combined commercial activities on a rolling 13 month basis. This means you may be able to get away from not charging HST.
Practically speaking, most real estate brokerages require their agents to register with the government to collect HST. I have yet to see a real estate agent client that is not registered for HST..
Most real estate brokerages require realtors to provide their HST numbers, whether they make over $30K commission or not. Once you get your HST numbers, you are required to charge HST on the commission you collect, regardless of the amount you earn.
Some brokerages charge HST on behalf of their realtors. Then, they deposit the commission income, together with HST collected, into the Realtor’s bank account.
Most new Realtors do not understand that even though the HST money passes through your bank account, it doesn’t belong to you. You are only collecting it on behalf of the government.
This means you must keep track of the HST you collected on behalf of the government. Then you subtract the HST paid on all the services/products used for business purposes. Afterwards, you remit the net difference to the CRA at the end of the filing period.
Traditional Method Of Calculating Harmonized Sales Tax (HST) Payable
Let’s illustrate with an example…
If you make a $100,000 commission income for the year, in Ontario, you must charge 13% HST on behalf of CRA. So, you receive a total of $113,000 from your clients through the brokerage.
Note that you’re only eligible to claim the deductible portion of the HST you paid on meals & entertainment and the business use portion of the HST you paid on automobile expenses.
For example, only 50% of the HST you paid on meals & entertainment can be claimed against the HST you collected.
If you use the vehicle 90% of the time for business use purposes, only 90% of the HST you paid on vehicle expenses would be claimed against the HST you collected.
HST or PST you paid on insurance are not eligible to be claimed against your HST collected.
Assuming you spend $20,000 on goods and services as a business expense and pay 13% HST ($2,600) to the vendors, you would have paid $22,600 in total.
At the end of the filing period, you need to file an HST return and remit the net difference between what you collect and what you pay to the government.
In our example, it is $13,000 – $2,600 = $10,400.
CRA recognizes how much work is involved in filing an HST return, so it offers taxpayers another way to file HST returns more quickly and accurately.
This is called the Quick Method.
The Quick Method of calculating Harmonized Sales Tax (HST) payable
For Realtors to qualify for HST filing using the Quick Method, they have to meet the following conditions:
- The Realtor’s annual commission income must be below $400,000
- The Realtor must make an election to file the Quick Method or NOT revoke an election under the Quick Method.
- You are not a taxpayer such as accountants, bookkeepers, public institutions, etc.
Now that we have established the conditions required to qualify for HST filing using the Quick method let’s dive into how this method works.
In Ontario, Quick Method Remittance rates for service providers is 8.8% on gross income received (inclusive of HST), while for resale of goods, it is 4.4%.
As a Realtor, you are also eligible to claim 1% on the first $30,000 eligible supplies as a credit.
This means you would apply 8.8% to your income and subtract the 1% credit for the first $30,000 eligible supplies.
Using the same example above, you collected $100,000 income plus $13,000 HST from your clients. Ie. Gross income inclusive of HST = $100,000 + $13,000 = $113,000 in total for the year.
The Net tax payable under Quick method = $113,000 x 8.8% – $20,000 x 1% = $9,944 – 200 = $9,744
Recall that in the example above, if you were to file HST under the traditional method, our Net tax payable using the traditional method = $10,400.
This means you get to SAVE $656, which you will have to add to your income and pay the tax on it.
Even if you are at the top marginal tax rate in Ontario paying 54% tax, you will still net $302 after tax!
The Quick method is great, especially for businesses that are labor intensive with low expenses.
Benefits for filing using Quick Method
There are a few benefits using Quick Method for your HST filing:
- If your expenses are low in relation to how much you have collected, this can provide some tax savings, as illustrated with the example above.
- If you want to have certainty in terms of how much HST you have to pay, the Quick method provides a quick and easy calculation for you to set aside the amount for payment. For example, if you earned $100,000 commission, collected $113,000 from your brokerage, and you wondered how much you need to set aside.
With the Quick method, all you need to do is take the amount deposited in your bank account, multiply it by 8.8%, and you have the exact amount you need to remit to CRA.
In our example this would have been $113,000 x 8.8% = $9,944.
This helps with cash flow management and you know exactly how much you would need to set aside.
- Simple calculation – as illustrated in our example, the HST payable calculation can be as simple as taking the gross commission income and multiplying it by 8.8%. You don’t need to complete your entire set of bookkeeping before knowing what you have to pay.
No adjustments required for the non-deductible portion of meals and entertainment required. No adjustments for the personal use portion of your car expenses. All you need is your gross commission income, inclusive of HST x 8.8%.
Downside of using Quick Method
With its simplicity, it comes with a few disadvantages:
- If your expenses are high, using Quick Method to file your HST may cost you money. You’ll lose out on claiming extra HST that you pay on your high expenses.
- You can’t make a change easily. If you want to revoke your election to use Quick Method to file HST, you have to revoke the election by the due date of the HST return for the last reporting period for which you want to use the quick method.
We have a client who has been consistently late with his HST filing. By the time he recognized the HST implication and would like to revoke his election, it was too late.
- Quick method is only available for realtors who make less than $400,000 commission income. If you make more than that amount, you are not qualified to use the Quick Method for filing.
Deadline to file elections
For an annual filer, your deadline to file the election is the first day of the second quarter.
If you file your HST return quarterly or monthly, you simply need to make the election by the due date of the filing period that you start using the Quick Method.
You must file an election BEFORE you can use the Quick Method to report Harmonized Sales Tax (HST).
In other words, more incentives to file more frequently.
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
How to Deduct Realtor Commission Rebate the Right Way
If you have worked in the real estate industry for a while, you probably know how realtor commission rebates work. However, if you are new to the field, you may be wondering how this rebate works and if you could avail it.
How does realtor commission work in Canada?
Realtor commission is the payment received by you (realtors) for your services. The commission is generally calculated on a percentage basis, sometimes on a fixed amount basis. This means, as a realtor, you can negotiate what percentage of the property’s sale price or what exact amount will be commissioned to you by the seller, upon the sale of the property.
Typically, the commission charged can range from as little as a small fee to as high as 6% in the marketplace, which is then divided between the seller’s agent and the buyer’s agent. The actual amount of commission charged is based on your negotiation with your clients.
As an example, if you charge 5% commission on a listing deal, depending on your arrangement with the seller and market conditions, both buying agent and selling agent can earn a commission of 2.5% each, respectively.
It is important to remember that this may not always be the case. The division of realtor commission varies depending on what the seller arranges with their agent.
Home buyers and home sellers are aware of these commission structures and the dollar amount that selling agent and buying agent makes.
It’s not uncommon that some clients are asking for a commission rebate before committing to become a client.
You may wonder, can you deduct this commission rebate you pay to the client?
If so, what type of documentation do you need to keep in case you get selected for a CRA audit?
Would the client be required to report the rebate amount as income?
Deductibility of commission rebate
Generally speaking, taxpayers are allowed to deduct all reasonable expenses they incurred for the purpose of earning business income, subject to certain exceptions.
As long as you are able to establish the cause and effect relationship and the type of expense does not fall under one of the exceptions specified in the Income Tax Act, chances are, you are eligible to deduct the expense against your commission income.
A real estate agent will only pay a commission rebate with a successful deal.
In most cases, the commission rebate enables real estate agents to secure the relationship with the client.
The direct cause and effect relationship allows the real estate agent to deduct the commission rebate as an expense.
Ways to pay for commission rebate
There are 3 different ways of paying commission rebates in the real estate agent world.
- Direct payment paid by cash
- Direct payment paid by Cheque or Electronic Funds Transfer
- Brokerage issue a payment to clients at closing
If you pay your client in the form of cash, although it is technically deductible, you may have a harder time proving your expense when you get selected for an audit by CRA.
Typically, cash payments to clients is the hardest form of payment you can deduct. Unless, your clients are willing to sign an acknowledgement that they receive the rebate from you in respect to a particular deal.
If you pay your clients in the form of cheque or electronic fund transfer, you should have better luck for deduction than paying cash. When you issue the cheque or electronic fund transfer for commission rebate, make sure you write down in the note section that the cheque is issued for commission rebate, the deal it is related to and the client’s contact number. Print a copy of the cancelled cheque or payment confirmation and save it as documentation for commission rebate.
The best way to pay your clients commission rebate is via your brokerage. When your brokerage collects your commission cheques, you can request your brokerage to direct a portion of the commission cheques to your clients. In fact, the real estate board in certain provinces require the licensed real estate agents to issue rebates via the brokerages that they belong to.
The benefit of paying via brokerages is the direct cause and effect relationship you can establish. Without the commission cheque (earning the revenue), you would not have incurred the commission rebate (incurring the expense).
Depending on how the brokerages track your real estate commission, do make sure that you are accounting for the commission rebate payment. A reconciliation between the tax worksheet and the actual amount received should be done to make sure all deductions are claimed.
Is client rebate taxable in the hands of clients?
Client rebates may or may not be taxable depending on the type of properties that they are purchasing or selling.
In the case of a primary residence, the rebate received by the clients as a direct result of listing or selling the primary residence, is used to increase the sales proceeds in the case of selling, or reduce the adjusted cost base of your primary residence in the case of buying of your primary home.
In either scenario, if the clients are using the property solely for the purpose as primary residence for themselves, there is no income tax implication.
In the case of selling or buying rental properties, the rebate is used to increase the sales proceeds in the case of selling, or reduce the adjusted cost base of the rental properties respectively.
Tax implication comes in the form of capital gain upon sale of the rental properties.
If you are interested in knowing more about your tax implications as a realtor, I spoke about this here last week.
Best of luck negotiating those realtor commission rebates!
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
What is a Realtor’s tax? Self employed vs. Employee
A Realtor’s tax is often determined by his/her employment category. Realtors, like many other professionals, can either own their businesses or be employees. The language used in the legislation governing real estate trading activities can be quite confusing. It sometimes refers to the self-employed realtors as “employees.”
However, self-employed and employee realtors have two very distinct meanings in the eyes of the CRA. Here’s their definition, “The CRA looks at the facts of the working relationship between the payer and the real estate agent”.
A Realtor’s tax hinges on how the CRA sees them. So let’s dive into the factors that decide whether a real estate agent is an employee or a self-employed worker.
How to determine if a Realtor gets taxed as a self-employed individual or an employee?
A Realtor’s tax when you are self-employed:
According to CRA, these factors determine if a realtor is a self-employed individual. The realtor …
- Pays administrative fees:
The realtor pays a fixed amount to the real estate broker as administrative fees. These fees include desk fees, reception service, use of office facilities. Others are transaction processing, in-house accounting, etc. - Controls and establishes the rate of his/her commission:
The realtor has the right to decide whether he charges a 2%, 3%, 5% or 6% commission or whatever amount of commission he/she wants. He/she can even waive the commission if he/she chooses to.
Self-employed realtors can choose to make as much as they want or as little as they want. This means there’s no minimum number of listings and purchases or dollar volume of sales self-employed realtors are required to achieve. - Pays for his/her own equipment:
The self employed realtors are in charge of all tools needed for work. This includes cell phones, personal marketing websites, cameras, signs, staging furniture, computers, etc. - Exposed to financial risk and pay expenses associated with their sales activities:
These expenses can include car insurance premiums and repairs. They also include professional liability insurance premiums, real estate association membership fees, etc. - Flexibility to hire help and build a team:
A self-employed realtor is free to hire administration staff, buying agents, selling agents, marketing team staff, etc. to help him/her to build his/her business. He/she is his/her own boss.
Self-employed realtors also provide equipment to their team members to work, most likely to have an office and have control over what they can delegate to their team members to work.
- Generate one’s own leads and covers advertisement costs:
A self-employed realtor is responsible to generate his/her own leads. He/she works to build relationships with clients. The realtor covers the cost of their advertisement, builds his/her team.
From the factors listed above, you can see that the majority of the realtors are self-employed.
As self-employed realtors, you can also deduct a bunch of expenses that you incur for the purpose of earning the business income. You can refer to this previous post regarding the list of common expenses that realtors can deduct.
Here’s a Youtube video to discuss in depth what you can deduct as a self-employed realtor.
However, there are exceptions in this trade too, every once in a while.
Some builders hire licensed realtors to do showings or negotiate listing deals. Just as employers in any other field hire employees to perform specific duties. These duties are under the direction and control of the hiring party.
This happens in the case of new development… Builders may hire a realtor on staff in their office to facilitate sales. Depending on the form of relationship and the intention of both parties, on-site realtors can either be taxed as self-employed realtors, such as the one mentioned above, or as employees, as in the case listed below.
A Realtor’s tax when you are an employee:
According to CRA, these factors determine if a realtor is an employee. The realtor …:
- Isn’t required to cover administrative costs:
The realtor is not required to pay any fee or amount to cover administrative costs. In other words, no desk fees, transaction costs, etc.
- Retains a percentage of the realtor’s sales:
Depending on the arrangement between the realtor employees and the employer, realtors may be offered a sales commission or an annual bonus to encourage sales effort. - Performance of specific tasks, at specific time and at specific location:
The employer requires the realtor to perform specific tasks. Such tasks include answering phone calls during a particular period at the office, performing showing activities, putting together purchase and sales agreement, etc.
In addition to that, the employer also has control over when and where the realtor employees work.
As an example, the realtor employee may be asked to be full time stationed at a sales office for a builder.
- Supply of equipment
More likely than not, realtor employees are not required to provide equipment for work, although there are some exceptions. Employers are responsible for laptops, signages, websites, etc. - Cannot further outsource or delegate tasks:
Unlike self-employed realtors, real estate agents working as an employee has limited flexibility to outsource or delegate tasks to a third party. - Limited exposure to financial risks:
Like all other employees, realtor employees have limited exposure to financial risks. The employer is responsible for the cost of operating the business, paying the employees on time, and generating leads, etc. Realtor employees have a defined set of responsibility and deliverables and are not responsible for the financial health of the business in general.
As realtor employees, deductibility of expenses depends on your arrangement with your employers. Generally speaking, employees can only deduct employment related expenses if the employers issue a T2200 to the employees at the end of the year.
A Realtor’s tax is definitely not as simple as the list of indicators above. The list is by no means exhaustive. However, these are the common factors that the CRA uses to determine a relationship between brokerages and the realtors that work for them.
You can use these factors to evaluate your personal situation to determine if you are self-employed or an employee
I do hope these factors helped you at least clarify the distinction between the two types and gave you a basic understanding of “what is a Realtor’s tax?”
Best of luck this tax season!
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
How To Qualify For Financing in PREC?
Realtors often ask, “how do I qualify for financing in PREC?”
If you have been in the real estate industry for a while, you have probably heard, getting mortgages in a corporation is extremely difficult.
Well… let’s clear that misconception!
Some rumors associated with qualifying for financing in PREC
- Banks don’t like corporation when it comes down to real estate investing
- Banks don’t work with corporation on residential mortgages
- Banks charge higher interest rate when you qualify to buy investment properties in corporation
- Banks works with corporations if you have a small business in the corporation
So, when my Stock Hacker Academy student Andre Matos shared how he got himself financing in his holding company with an A-lender, I couldn’t help but invite him to be our guest on our YouTube Channel, and grilled him over his secrets!
Andre is a Home Financing Advisor at Scotiabank. His wife is a physician that operates her practice out of her medical professional corporation. They have acquired multiple properties using a holding company structure.
Let’s hear directly from what Andre has to say…
Scotiabank isn’t the only one though. Over my time, I have spoken to a few different lenders and mortgage brokers that are willing to finance mortgages held in the corporations as well.
Some things to remember…
As a Realtor, if you decide to own rental properties in a PREC…
Some traditional mortgage brokers may or may not be able to get your financing. But, there are a few other options available depending on your situation.
- Own properties in trust for the corporation via trust agreement
You can find out more about this type of property ownership via this post here. The downside of owning the properties in your personal name is that they can eat up your credit limit pretty easily. If you have a goal of having a large real estate portfolio, owning properties in your personal name may limit the opportunities to buy more properties in the future.
- Work with banks that are willing to lend directly to your corporation
Almost all the banks are willing to lend directly to a corporation. Typically, you have to approach the bank directly/ work with other lenders who will then decide how much to lend.
Different banks might have different cash flow requirements. A bank that I have worked with in the past, required a cash flow coverage ratio of about 1:2. This means that the rent has to cover all the expenses including the mortgage payment by 1:2.
This bank would take into account my business income from multiple sources of businesses (in the corporation and business that I own personally) and qualify us for financing based on all of my income source AND the cash flow of the rental properties.
By owning rental properties and qualifying for mortgages directly inside the corporation, your personal credit report might or might not be affected by these mortgages.
If it doesn’t, it will likely give you an edge in qualifying for more mortgages in the future, assuming your goal is to grow your portfolio to fund your retirement.
Documents you would need if you qualify for financing directly in PREC
- Financial statements with Notice to Reader report for the last two years (it’s okay if you don’t have two years when the corporation is brand new)
- Corporation by-law, shareholder registry, director resolutions
- T2 corporation tax return with the proper rental schedule filled out showing the rental income and expenses for each property for the last two years
- Notice of Assessments issued by CRA from the last two years
- Rent roll
- Property tax bills, rental agreement
- All other documents as required by the specific bank
I feel humbled to acknowledge that I have helped many realtor / real estate agent clients achieve successful financing in PREC’s. My team specializes in helping our clients minimize their taxes and help them build their profile helping them achieve their goals faster.
You can use this link to book an appointment and speak to a qualified accountant. Let’s help you qualify for financing in a PREC!
Until next time,
Cherry Chan, CPA, CA
Your Real Estate Agent Accountant
6 Common Realtor Tax Related Questions Asked By Over 200 Realtors
Are real estate agent taxes what keep you up at night? Are you a realtor worried about your tax implications? You are not alone!
On a coaching call with over 200 realtors a while backI was asked these golden questions. I find these realtor tax questions ever-relevant, as more and more realtors and real estate agents keep asking me these questions over time.
So… these questions may be a refreshal for some of you and may be extremely knowledgeable for those of you that are new here.
1. When filing tax as a Realtor, can I deduct clothes and dry cleaning?
Simply answering this… No..
Clothes and dry cleaning, unfortunately, are not an expense that you can deduct when filing your income.
In a past court case,a Quebec female lawyer claimed her suits as an expense for work and got disallowed by the court. The Judge in the case cited that the requirement to wear dark-colored clothes at her workplace does not mean that she cannot wear these outfits elsewhere. Hence, deduction was not allowed.
There was also another court case whereby a financial advisor claimed a deduction of $8,400 he spent on buying custom suits to go with his new office.
The Judge in this case, similarly, disallowed this deduction, based on the same reasoning.
2. Can I deduct sports or any seasonal events tickets when I file tax as a Realtor?
The answer here again is no, but there is an exception!
The exception is that if you are taking your client to a specific sports event (with the intention of discussing business and generating additional income), then you can deduct the expense.
But the deduction is limited to 50% (similar to the meals and entertainment expense) to eliminate the personal entertainment portion from the deduction.
Similar to all other expense deductions, you’re required to document the name and your business relationship that you have with him/her.
3. Can I deduct any conference expenses from tax ?
If you are self-employed as sole proprietor or partnership, you can only deduct up to two conferences you attend during the year.
If you are a Realtor in a corporation, this rule does not apply to you.
4. How do I do a cash flow forecast?
As I shared during my call with around 200 realtors, I usually start doing cash flow forecasts based on historical information from a prior year.
You would take all the expenses you incurred from the same period the prior year, and project it to the upcoming year.
For expenses that you know you are going to increase, adjust them accordingly.
For example, if you hire a new marketing full-time employee and it’s a newly created position, the expense would not have been captured in your prior year expenses. Therefore, you would adjust the payroll accordingly.
If you know that you are committed to a new marketing campaign that would cost you $3,000 a month, make sure you adjust your forecast accordingly.
Alternatively, let’s say you spent thousands of dollars last year on renovating your new office. This year, you won’t need to do any., So, you would adjust the current year’s cash flow forecast accordingly.
From here on, I go back to the revenue.
For realtors out there, I will start by making the cash flow projection based on prior year income.
I will then do scenario analysis, with best case scenario and worst case scenario to project for upcoming year cash flow.
This case, you can get to learn more about your business, be prepared for all the downtown and make a business decision with ease.
Alternatively, you can speak to your accountant and request for a cash flow statement from prior year to help you get a better understanding and head start of your following year’s cash flow.
There’re more than one way to crack an egg. There’re many different ways to prepare your cash flow forecast and perform additional analysis to stress test your business. Be sure to talk to a professional accountant who understands your situation that can explain to you in layman terms how it works.
5. Should I hire my assistant as a subcontractor or employee?
If you hire someone as an employee, you are an employer, so you are required to make CPP and EI contributions.
You may also be required to pay severance when you let go of the employee.
You are also required to submit source deduction remittance on a regular basis to CRA. Initially, you are required to do so on a monthly basis, unless you meet the quarterly remittance requirement. In exchange, the employee can claim employment insurance (EI) if he/she is let go.
On the flip side, hiring someone as a subcontractor may save your employer a portion of CPP & EI.
The subcontractor can also deduct expenses that he incurs to earn the income, but he loses the opportunity to claim EI because he’s primarily self-employed.
It is never a decision made by you; preferably it is a question of fact based on the following criteria:
- Intention: Are both parties intend to work as an employer-employee relationship? Or subcontractor? This can be an agreement signed representing employment or a subcontracting agreement.
- How much control do you have? Do you control exactly what and how and when the other party works? The more power you have, the more likely it is an employer-employee relationship.
- Who supplies the tools & equipment? Imagine hiring a plumber to fix your water problem, and chances are, he comes in with his tools. He’s a subcontractor. If you hire an employee, the employer provides the tools to perform the work.
- Can the worker subcontract work and hire an assistant? If he has the freedom to subcontract out the work, that’s also an indication the worker is a subcontractor.
- Opportunity for profit? Subcontractor = having your own business. If you are your boss, this means that you can risk losing money. If the worker has no way of losing money, chances are, he is more an employee than a subcontractorFinancial risk? Does the worker require to pay ongoing expenses that would not get reimbursed? Employee expenses are generally reimbursed by the employer whereas subcontractor expenses will not.
Make the decision based on the above criteria when hiring. It can save you some headaches when you get audited.
6. Should I incorporate as a Realtor & what are the tax advantages?
If you read my recent blog post, you would have known that I am a big proponent of using corporate structure mainly for its flexibility and tax deferral opportunities.
If you incorporate, you can deduct more than two convention expenses during the year.
If you incorporate, flexibility can be built in to split income with spouse or adult children.
If you incorporate, you may be able to sell your business (active business not rental portfolio) sheltering a significant amount of capital gain tax.
If you incorporate, you may be able to invest in the corporation structure much faster, even with the tax changes imposed earlier this year!
Of course, like any tax strategies, there are some cases that we don’t recommend incorporation. It all goes back to your specific situation.
Be sure to talk to someone that knows realtor business and real estate investment to discuss your strategy.
Until next time,
Cherry Chan, CPA, CA
Real Estate Agent Accountant
Should Realtors Incorporate?
Did you know that realtors weren’t allowed to incorporate and receive commissions through corporations until just two years ago?
In March 2020, a couple of local MPPs brought a bill to Parliament that passed and incorporation for realtors became an opportunity. An opportunity for realtors to build their retirement fund using a real estate portfolio with corporations.
In essence, when a realtor decides to incorporate, the realtor owns their own real estate business in the corporation. Once a realtor is incorporated, he/she runs his/her businesses through the corporation. All commission income, related expenses, business assets and liabilities are all run through his/her own corporation.
Corporation is considered a separate legal entity in the eyes of the law. As a result, it files taxes on its own. Thankfully, in Ontario, most small business corporations are paying 12.2% income tax on net income received.
Because corporations are considered separate legal entities, when you withdraw money from the corporation, the withdrawal can trigger tax implication on your personal tax return.
Now to answer the question most of you may be asking (why would I do that?), keep reading.
You can even watch this video which addresses most of your questions.
Why should realtors incorporate?
- Use Tax Savings made in your realtor business for your Retirement Savings
You pay only 12.2% income tax rate on your net realtor income inside a corporation (as opposed to most realtors being taxed upto 53.5% if they don’t incorporate). This means you have 87.8% left available for reinvestment in the corporation, without paying another level of personal taxes.
The savings that you are achieving through a corporate structure is
You could invest in your retirement by buying a few investment properties as well, or invest in high dividend paying stocks, allowing you to build a passive stream of income.
- Split income with your family members
Income splitting via corporations is not as easy as in the past. In 2018, Government of Canada enacted a bunch of new rules significantly increasing the difficulty of income splitting with service corporations.
There are still a few ways to split income with your family members though:
For the family members who work less than 20 hours per week in the past 5 years, you can pay lower income family members a reasonable amount of compensation, based on the work performed.
If your lower income family members are working at your business for over 20 hours a week in the past 5 years…
you can still issue dividends to them thus achieve income splitting and lower your overall family tax bill.
If you reach the age of 65….
you’re eligible to split income with your lower income spouse.
If you create a proper plan…
you can even split investment income you earn in your corporation with other family members properly.
Therefore, income splitting is still a possibility! You will need to jump through a few hoops to lower your taxes, but it’s possible. Of course, it requires careful planning and a professional that can help you avoid all the tax traps out there!
- Split income with your spouse when you reach the age of 65
One way to split income with your spouse is when you reach the retirement age of 65. You can do this via dividend income. For this, a proper corporate structure needs to be in place when the corporation is set up.
You can read more on this in my book, where I illustrate in depth using examples.
- Smooth out income over the years
Building a business is not an easy task. You may do well some years while not so well in other years.
You may do well some years while not so well in other years,
If you don’t have a corporation, in the years that you do well, you pay a lot of taxes. Remember, that the highest marginal tax rate in Ontario for personal taxes is 53.5%.
For the years that you don’t do so well, you have way less tax to pay.
By using a corporation to own your realtor business, you’re paying 12.2% corporate taxes regardless of good years or bad years. You take out what you need to support your lifestyle. Some of the income can be retained in the corporation for future years, thus allowing you to split income with your future self when business may not be as good in some years.
Corporations can provide tax planning flexibility and tax deferral opportunities.
If you incorporate…
flexibility can be built in to split income with spouse or adult children.
If you incorporate…
you may be able to sell your business (active business not rental portfolio) sheltering a significant amount of capital gain tax.
If you incorporate…
you may be able to invest through the corporation structure much faster, by using the money that you would otherwise pay to CRA as personal income tax to invest for yourself, even with the tax changes imposed earlier this year!
SO, in conclusion, YES, in my professional opinion, if you make more than you need to support your personal lifestyle, realtors should incorporate.
It is important to remember that every individual’s situation is different, as I advise all my clients, it’s best to sit with your personal accountant to discuss your options further.
You can always sit down with a member of our team, a professional that is familiar with the new rules, regulations and can provide the best advice for your personal situation.
Hope this helps you answer the question of whether you as a realtor should incorporate?
Until next time,
Cherry Chan, CPA, CA
Real Estate Agent Accountant