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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. 

  1. Direct payment paid by cash
  2. Direct payment paid by Cheque or Electronic Funds Transfer
  3. 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