Can You Deduct Travel Expenses in Canada?

“Can I deduct travel expenses, and if yes, then how?”, Realtors and small business owners often ask this question. 

Generally speaking, you can deduct expenses that you incur to earn business income/rental income, subject to a bunch of exceptions, as specified in the Income Tax Act.

Whether you are eligible to deduct a trip, you need to answer the primary question – did you incur these travel expenses for earning a business income?

You can watch my vidoe on this here.

Can you Deduct Expenses?

To deduct your travel expenses you need to show that your trip was for the purposes of earning a business income.  In simpler terms… it must qualify as a “business trip”.

Things you need to consider:

  • Have you left your tax home for more than one working day? Your tax home is where your business is based. 
  • Was your trip mostly business? Or did you spend the majority of your time that wasn’t occupied for the purpose of earning a business income, i.e meeting with clients vs. meeting with friends with leisure.
  • Were your expenses necessary or were they extravagant? For instance, if you rented a car out, did you go with a fair average car or did you rent a tesla?
  • Did you plan your expenses?

How Guy Laliberté tried to deduct expenses and failed

Some of you may remember the infamous court case involving the founder of Cirque du Soleil. Let’s use his case as an example:

Cirque du Soleil’s majority shareholder, Guy Laliberté tried to deduct expenses related to his travel to space as a business expense back in 2018. He claimed deduction of his entire trip in Cirque du Soleil’s operation, stating that this trip increased publicity and provided media coverage that would otherwise cost over $300million to achieve.

His trip cost roughly $42million. He deducted expenses worth $38million and left  $4million as shareholder benefit.

If he had been allowed to deduct the $38million, he would have saved 27% in taxes, equivalent to $10million tax savings.

Since the expense was NOT necessary or reasonably justified as being paid by the company, he had to report this $38million in his personal tax return, resulting in personal taxes of $19million. 

Yikes! No wonder CRA denied this claim.

The judge acknowledged the increase in media exposure to Cirque du Soleil because of his trip to space. However, the judge concluded that the primary purpose of the trip was for personal purpose rather than for business purpose based on the following reasons:

  • Guy Laliberte admitted in multiple videos’ interviews that going to space had been his childhood dream
  • The two initial payments (worth USD$25M) made to the space company organizing the trip were made by Guy Laliberte’s holding company, rather than directly from Cirque du Soleil’s operation. Resolution to authorize the trip did not mention the purpose of the trip.
  • Agreement with Space Adventures was initially signed with the Holding Company. Not directly with Cirque du Soleil.
  • There was no evidence showing that anyone other than Guy Laliberte would be sent to space.
  • Defendant claimed that the expense helped Cirque du Soleil’s debut in Russia. Russia’s operation has other arm’s length partners, the cost of the show was charged back but later got reimbursed. Russian’s operation bears no cost for the trip.
  • Cirque du Soleil did not monitor the increased exposure during and shortly after the trip was taken.
  • Cirque du Soleil’s promotion planning was started after Guy Laliberte committed to taking the trip.

In conclusion, the judge found that the primary purpose of the trip was purely personal, so he disallowed the deduction but allowed the actual costs incurred by Cirque du Soleil and One Drop Foundation to promote the trip.

Was I (Cherry Chan) able to deduct my travel expenses?

In the same year, I went to Hong Kong, to attend a family funeral. As you can tell, the primary purpose of my trip was personal.

I did spend some time doing work, but the business-related reasons were very minimal compared to the primary objective of my trip.

The simple answer to the question is no. I couldn’t deduct the flight and hotel costs of the trip.

But I was able to deduct the incremental costs I incurred for working on the business while I was there.

I didn’t incur any expenses for my video recordings and book writings. If I did, those incremental expenses would have been deductible.

If I had met up with a prospect to discuss future business opportunities, the meal costs for taking this prospect out would have been deductible.

What is deductible, if I (Cherry Chan) can’t deduct my travel expenses Guy Laliberté couldn’t deduct his?

Although the cost of my trip to Hong Kong was way less ($1,500) than the cost of Guy Laliberté trip ($42million), the rule here is the same.

The main takeaway is this: to deduct expenses, the primary reason for your trip must be a business purpose.

If the primary purpose of the trip is to attend a business-related conference or to meet with suppliers/prospects/clients – make sure you have the right documentation to prove so, (such as email communications) before you plan to deduct expenses of the trip.

The sequence of events matters.

If you also want to take a tour, have some R&R while you’re there, timing and evidence would matter.

Room & board, however, would be deductible if the trip is for business. Expenses incurred for personal enjoyment would not be deductible.

On the other hand, if you plan your vacation first, then tag on some business activities afterwards. The timing of your email communication and planning will be completely different.

Publicity may be good or bad, be careful with what you publish online.

Whenever I tell people that CRA auditors use google search as well, people always laugh.

It’s true. If you can search for the information, CRA auditors can do the same thing. And trust me, they would!

If you are telling people on social media that you are taking your family for a Disney cruise, chances are, they can also find out!

What you publish online matters.

Family can come along but be careful and deduct only what’s business related.

If your family is coming along and they do not participate in the business, you probably should keep their expenses as personal.

If the primary purpose of the family making the trip was to help at the tradeshow, you may be able to deduct expenses made on this trip.

Just be mindful with the key consideration here: is the primary reason for your trip business related or personal purpose?

Until next time, Safe travels!

Cherry Chan, CPA, CA

Real Estate Agent Accountant

What’s the HST Rebate on New Home?

A HST rebate on a new home? Can your client potentially get one? Recently, a realtor asked, “how can builders avoid charging HST on new homes?”

Another realtor also reached out to me, asking “the HST implications on buying assignments that are pre-construction homes”.

There’s a lot of confusion when it comes down to HST charged on new homes and HST rebate calculation. 

I recently made a video talking about this in depth that you can watch here:

HST Rebate & Implication on Purchasing a Brand New Home 

Buying a new home often means that the buyer has to wait for it to be designed and built from scratch.

From the moment your client signs that “Agreement of Purchase and Sale” to the time they physically move in, could range from one year to five years, and sometimes even longer.

And like anything that is purchased here in Canada, HST is applicable when your client purchases a new build too.

Yes, your client could get a portion of the HST back as a rebate assuming they qualify.

Now, most people simply assume that they are going to get their full HST back. Unfortunately that’s not the case. nly get a portion of that money is  given back – the rebate.

If the house is $500K before HST, they have to pay $565K in total ($500K x 1.13).

. In the example below , the HST rebate on this house is $24,000.

Pre-HST Price $500K

HST charged 13% $65K

Less: HST rebate ($24K)

Net sale price posted by builder $541K

This $541K is the advertised price posted by the builder, with the assumption that the buyers intended to move into the unit. (Your client may  be eligible to assign the HST rebate application to the builder if the intent is to move into the property as a primary residence. The builder will get the HST rebate on behalf of your client and your client would pay the builder $541K only instead of $565K.)

This rebate is called New Residential Home Rebate.

As I mentioned above, it’s a common misconception to think that a full rebate is applicable. Most realtors mistakenly think that their clients would get their full HST back. Unfortunately that’s not the case. It’s important to note that your client only gets the rebate – a portion of the money back.

But… What if your client doesn’t intend  to move into the property at all?

As it turns out, this $24K HST rebate is still claimable if your client is renting this new rental as someone else’s primary residence with a one year lease. 

The process of applying is a bit more complicated. 

Instead of paying $541K in our example, your client  would have to tell the builder ahead of closing that your client isn’t  moving into this new home. 

Because your client isn’t moving into this new home,they  cannot assign the New Residential Home Rebate for the builder to claim it on behalf of them. 

As a result, builders cannot claim the rebate and they’re out of pocket for the $24K rebate. 

At closing, your client/s would pay the builder the $24K, which is $565K in total. 

Once they sign a one year lease with their tenant, they can submit an application to CRA under the HST New Residential Rental Property Rebate instead.  

With proper documentation and application form, your client’s can potentially get their $24K back within 3 months after their application. Not a bad turnaround time. 

Ultimately, your client is still getting their $24K back, it’s just going to take a bit longer to claim the money back. 

Example 1 – HST Rebate New Home (winning court case)

In a recent court case, a taxpayer originally purchased a new home with the intent to move in after his wedding. Unfortunately the couple split up and the wedding didn’t happen. He sold the house a short time afterwards.

CRA dismissed the HST rebate application on the basis that the taxpayer did not have the intention to move into the new home as the primary residence, largely based on the fact that he didn’t change his address with CRA and Ministry of Transportation from his parents’ house in which he lived, prior to living in his new home.

He appealed to the court and he was able to win the case, with the help of his hydro bills that were sent to his new place, and with his friends’ testimonies stating that they helped him move from his parents place to his new place.

This takes me back to my previous blog post – keeping good documentation matters. Even something as trivial and unimportant as hydro bills, could still be evidence in court to substantiate your client’s position and claim.

Keep in mind that to qualify for HST rebate under the New Residential Home Program, your client/s needs  to demonstrate that they intend to move in at the time when the agreement of purchase and sale is signed.

Now, Intention is a subjective matter. Providing all corroborative evidence to substantiate a claim would definitely help the position of your client’s claim.

On the other hand, if your client’s intention is truly to invest in a newly built home and they have never had the intention of moving in, advise them not to  lie.

They still have a chance to claim the same amount of rebate back. All your client needs to do is to come up with the money up front at closing.  With a one year lease and proper documentation, your client can still get the same amount back with New Residential Rental Property Rebate

Example 2 – HST Rebate New Home (losing court cases)

In a 2016 court case, the taxpayer claimed she moved into a new house for half a year, before she moved back in with her husband and rented the new residence out. 

Although she claimed to have moved into her new home, she was unable to provide independent evidence (such as hydro bills) to substantiate her claim that she had lived in her new home. Her appeal to the court was disallowed and she didn’t get her HST rebate back.

Similarly in another 2016 court case, a taxpayer claimed that he and his wife were living in the new home that they just purchased while waiting for their old residence to be listed and repairs to be completed. They subsequently sold their new home 3 months after closing.

CRA caught on to them.  Because they sold their newly purchased homes within 3 months after closing, CRA thought that they never moved in.  If they never moved in, they would not have the intention to move into the newly purchased homes.  Because they never had the intention to move in, at least in CRA’s eyes, they would not have qualified to assign the HST rebate to the builder to claim.  

This couple disagreed with CRA’s position, and took CRA to court.  The couple had to provide evidence to support their intention and their claim.  

The taxpayers provided an agreement to list their old residence for sale, dated 2 years after they sold their new build, attempting to prove that they did move into this new build for a short period of time as their primary residence. The judge sided with CRA as the agreement to sell was dated 2 years afterwards.  Inconsistent with the couple’s claim. 

In conclusion, if your client wants to move into a new home, make sure they know they do know that they have to move in. They need to have evidence such as utilities bills, internet bills, moving bills, furniture delivery bills and driver license address change showing that they have moved in.

If your clients are planning to purchase a new built as your rental, make sure they know not to  assign the right to the builder to claim the residential rebate back. All they need to do is fill out a different form and they should be eligible to claim the same amount of rebate back with a one year rental agreement.

However, If your clients are planning to flip the new house without moving in, make sure you consider the loss of HST rebate as part of their cost.

Now, it’s always better to be prepared than to be sorry. Therefore, I always advise my clients to sit with their tax advisor for a personalized consultation of their situation. If you or your clients need a consultation, we’d be happy to sit with you and your client and assess the situation.

I do hope you now understand the HST rebate on new homes – New Residential Rebate –  is now simplified for you.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Real Estate Agent Accountant

P.S If you are a realtor looking to know about the tax deductions you can make, read this post here.

Should You Buy or Lease a Car to Maximise Tax Deductions?

Should You Buy or Lease a Car to Maximise Tax Deductions?

When you go to Buy a  Car, you get presented with various financing options with many car dealerships offering different promotions. 

And purchasing a vehicle is a big investment and you want to make sure you are doing this correctly.

If you finance the purchase of your vehicle, the business portion of the interest expense can also be deductible. As you can also deduct the business portion of your auto lease payment or auto depreciation, many realtors often ask the question, “ – Should I lease a vehicle, or should I buy?” 

Here is a video for those of you asking yourselves this question.

To Buy a Car or Lease a Car?

Simply put, There is no one size fits all kind of answer.  Every deal is different.

Often, you are offered a different deal (set of pricing and rates) when you lease/finance the purchase, as opposed to buying it outright; The pricing is generally higher when leasing a car than buying outright. You usually get a cash discount if you buy the car without financing. 

Also, when you lease, the calculation can be drastically different within that, depending on a high mileage lease vs a low mileage one.

The buyback value at the end of the lease term can affect the monthly calculation as well.

You can also choose to buy a car outright with your line of credit – which is with another set of calculations.

So next time when you ask your accountant, “should I buy?, or should I lease?”, you can see how complicated it is to come up with a one size fits all kind of answer..

It’s not an easy calculation to see which one will provide a better deal at the end of the day.

Therefore, every deal is different, and every individual’s needs and circumstances are different. 

It’s mostly a financial decision, rather than a tax one. 

Nonetheless, I’m going to explain the possible tax deductions of both buying vs leasing when purchasing a vehicle.

What are the tax deductions if you buy a car?

Similar to all capital assets, you are allowed to deduct the capital cost allowance (CCA), which is the tax term for wear and tear, on the car.   

Income Tax Act allows you to claim up to $30K plus HST on a passenger vehicle purchased.

You can spend over $130K on Tesla’s Model S, but you get to claim only $30K plus HST. There is a CAP on what you can claim.

To explain the tax deductions to buy a car, I’m going to use my Honda Odyssey as an example for the analysis. 

Purchase price of a Honda Odyssey  = 38K (approx) + HST

This vehicle belongs to class 10.1 and 30% depreciation rate can be applied to the purchase cost (maximum $30K plus HST) or undepreciated balance annually.

Let’s assume that you use the vehicle 100% business use for simplicity. (Generally speaking, you need a logbook to document your business-use mileage to prorate for business use. you can find out more about the documentation required from this previous post ).

So,

Year 1 – you can get a deduction of $30K x 1.13 x 30% x ½ = $5,085
(½ year rule does not apply until 2024)

Year 2 – you get a full deduction
($33,900 – $5,085) x 30% = $8,645

Year 3 – deduction is calculated on the undepreciated amount
($33,900 – $5,085 – $8,645) x 30% = $6,054

Year 4
$ 4,236

As you can see, you get a larger deduction at the beginning when you first purchase the vehicle.  Deduction available gradually goes down as years pass. 

What are the tax deductions if I lease / finance a car?

When you are leasing a vehicle, CRA also imposes a cap on the maximum amount of monthly lease payment you can deduct. Currently, that is $900 plus HST as of January 2022

Just because your lease is less than $900, it does not mean that you can get the full deduction. A complicated formula is used to determine the maximum eligible leasing cost that can be deducted on an annual basis. 

Here’s the CRA’s website link to the calculation

My monthly lease payment is $592.50 taxes included.

Keep in mind the interest rate is 4.99% on the lease and I have a high buyback value of $19,500.

Year 1 deduction
(assume only 6 months similar to the case above) – $3,555

Year 2 deduction
$592.50 x 12 months
= $7,110

Year 3 deduction
= $7,110

Year 4 deduction
= $7,110

Year 5 deduction
= $3,555 (last year of the lease) and you likely will lease another vehicle or buy out the current car or get a different car.

The chart below summarizes the buying vs leasing deductions, and it’s potential tax savings (if your rate is at 50%).

Lease VS. Buy

From a tax perspective, the tax deductions between buying and leasing are very similar.  Buying allows you to take bigger deductions at the beginning of the ownership, whereas leasing means that you have a straight line deduction during the lease period. 

You may think it is more beneficial to lease, but…

Don’t forget that I pay 4.99% interest on my lease, which is translated to $5,638 for the entire term for 4 years.

You wouldn’t have this cost incurred if you were buying it outright.

What if it is a zero % interest rate?

Yep – buying gives a slight edge in my Honda Odyssey calculation.

If the lease rate is 0% which will not happen, you will have a tax saving of $9,765, less beneficial than buying. (See chart below)

Lease vs. buy

From the math analytics above, buying allows you to deduct more at the beginning, whereas lease deduction is smooth out over time.

It’s hard to come up with a pure apple to apple comparison given that interest rate and buyback value have a significant impact on the calculation.

What if I use my vehicle for both my self-employed business and my rental properties?

 If you drive the same car for your agent business and your rental properties, you are eligible to deduct the business portion for car expenses against your agent business income and the rental portion against your rental properties portfolio.

Say in year 1, you drive 5,000 km for your self-employed business and 3,000 km for your rental properties.

If you purchased the minivan, you can deduct Capital Cost Allowance (CCA) of $10,170 x 5,000km / 10,000km = $5,085 for your agent business.   

You can also deduct an additional CCA of $10,170 x 3,000km / 10,000km = $3,051 against your rental properties income.

Administratively, you are required to record the mileage seperately. pecifically used for your business, and the mileage specifically used for your rental properties separately.

Other considerations

  • What if you are a realtor driving your car from Barrie to St Catharine’s multiple times a week? You will have high mileage on the vehicle which generally is not suitable for leasing.
  • What if you know that the cost of maintenance is high, but you still want to drive the car when it’s new?
    Certain European cars are well known to have high maintenance cost around the expiry of manufacturer warranty. He loves the car, but he doesn’t want to keep it long term, better lease it and not to worry about the long-term maintenance cost.
  • You can sell the car at the end if you don’t like, but you can’t sell a leased vehicle.
  • Do you own your business in your personal name or corporation? If you own your business in a corporation, driving an old car would still allow you the same mileage deduction at $0.59/km for the first 5,000km and $0.53/km thereafter.
    If you don’t need to incur the cost to buy a new car, why bother?

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

The Question asked by every Realtor: Brokerage or PREC?

As a Realtor is brokerage for you? Or is PREC your best bet?

All ambitious realtors planning to take their businesses to the next level struggle with this question.

These realtors already have a system running to generate consistent leads. They hire showing/buying/listing realtors and have a team building their empire. 

And some realtors prefer to set up a brokerage to keep the entire team’s revenue in-house (I set up my mini-brokerage for tax purposes). Whereas others prefer setting up a personal real estate corporation (PREC).

The process of setting up a brokerage for a realtor can be pretty cumbersome. A brokerage is required by law to have a Broker of Record.  To become a broker of record, one must be holding the broker license. In Ontario, to become a real estate broker, on top of the brokerage course, you also need to take two additional elective courses.  It can be quite time consuming to complete all necessary education to obtain your broker license. 

Is there any significant difference between setting up a PREC or a Brokerage 

Absolutely! Below is a high-level business analysis of setting up a PREC or a brokerage. 

When I talk about the benefits of operating a brokerage, it is important to note the limitations of operating as a Personal Real Estate Corporation as well. 

Conversely, when I talk about the downsides of setting up a sub-brokerage, it is important to note the benefits of a Personal Real Estate Corporation. 

Benefits of setting up a brokerage as a Realtor:

  • The entire realtor team’s earnings are reported in one corporation. As a result, it’s easier for you to analyze the team’s performance as a whole. 
  • Recording the team’s performance in one entity makes the business more saleable. Without a brokerage, you have to show the T4A of individual team members to support the sales number.  Buyers may not place the same level of trust in sales figures.
  • Easier to sell. Selling an individual team is generally more complex than selling a brokerage.  
  • If you eventually plan to sell the entire team/brokerage, you can choose to sell shares. 

By selling shares to a third party, you can potentially qualify for Lifetime Capital Gain Exemption for upto $892K in 2021. This means that you can make $892K tax free. Provided that the brokerage complies with the requirement as Qualified Small Business Shares and not pay any taxes.  

  • Opportunity to have a different ownership structure:
    PREC requires that the realtor is the controlling shareholder who owns 100% of the equity shares of the corporation. A brokerage does not require this. This means that your family members can also own equity shares of the brokerage. You can even set up a family trust to own shares.
    If you sell your brokerage’s shares, your family members, who are also shareholders of the brokerage or beneficiaries of the family trust who owns shares,  can also enjoy their Lifetime Capital Tax Exemption. So, you get to save even more tax when it comes down to selling the business. 

Downsides of setting up a brokerage as a Realtor:

  • Board registration fees: 

In Toronto, if your brokerage needs to register with the board, you have to pay a one-time registration fee of over $5K. 

  • Franchise fee: 

If you choose to operate as a franchise, such as Remax, Keller Williams, Coldwell Banker, you are required to pay franchise fees to use their name to market your business.  This can be in the form of a one time payment or multiple payments . 

  • Annual contribution: 

On top of the one-time franchise fee, you may need to make an annual contribution to the franchisor as a brokerage. 

  • Legal/accounting fees:

You will also incur additional legal/accounting fees to review the franchise agreement at the initial setup. 

  • Unique address:

In Ontario, RECO requires that you have a unique address for your brokerage. You will need to rent a space for registration purposes. 

  • Software cost:

In Ontario, many brokerages use a system called Lonewolf to run their brokerage businesses. The cost of purchasing and maintaining systems can be high initially. 

  • Higher maintenance cost:

The brokerage needs to take care of the reconciliation of the commission trust account and client deposit trust account. These accounts must be reconciled monthly.  

  • More administrative effort:

A ‘Broker of record’ typically gets involved when the realtors have conflicts or complicated deals.  

If you set up a sub-brokerage, you are the broker of record. Therefore, you will likely have to handle any conflicts, complaints, etc.  

RECO may require the broker of record to attend mandatory training as well. Especially if the realtors breach any code of conduct.

Nevertheless, it is not all black and white.

We are here to help you navigate the pros and cons of each option. So that you get to make the most informed decision based on your goals. 

Book a consultation with us at RealtorTaxTips.ca today! We’re here to help you realtors decide if you should set up a PREC vs. Brokerage.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

How Realtors Maximize Tax Deductions on Gift Cards

As a Realtor, you may wonder if you can claim tax deductions on gift cards? If yes, then how?

Generally speaking, any expenses you incur for the purpose of earning income are tax deductible. Subject to certain limitations as specified by the Income Tax Act, ofcourse.

Limitations, such as subsection 67.1(1) of the Income Tax Act, that reduces the meals and entertainment expenses to 50% tax deduction instead of 100%, in respect of human consumptions of food or beverages or the enjoyment of entertainment.

This simply means that if you take your clients out for dinner, only half of the meals are deductible. You can spend $50 for both of you, but only $25 is deductible. This is stated in the Income Tax Act to eliminate the personal enjoyment portion of your meals.

You may also wonder, if you can deduct 100% of your meals expenses if you purchase restaurant gift cards entirely for the enjoyment of your clients without any of your participation?

Example: Real Estate Agent claims Tax Deductions

A self employed real estate agent, as a taxpayer in 2006 had already brought this scenario to court (The Queen v. Stapley, 2006 DTC 6075). The taxpayer often bought gift certificates for food and beverages and tickets of various sporting events to his clients. He did not attend the dinners and the sporting events and hence he deducted 100% of the costs.

Initially the Tax Court ruled in favour of the taxpayer, based on the fact that the purpose of subsection 67.1(1) was to eliminate the personal enjoyment component from the deductions and the taxpayer did not participate in any of these events.

Unfortunately, the Minister appealed the decision made by the Tax Court to the Federal Court of Appeal. Based on the literal translation of section 67.1(1), expenses for food, etc. are 50% tax deductible in respect of human consumption of food and beverages or the enjoyment of entertainment.

Just because the realtor did not get to enjoy the entertainment or the food and beverages, his clients did. And just because the objective of section 67.1(1) was meant to eliminate the personal enjoyment portion, the section was not written in such a way that it wouldn’t be applied if there was no personal enjoyment.

The judge reluctantly ruled in favour of the Minister. This means that all the gift certificates issued from a restaurant would be 50% deductible, not 100%.

Furthermore, in 2014, Judicial and CRA Interpretations of Canada Tax Law and Transactional Implication stated that if the gift certificates are issued by the supermarket, a permanent establishment that is primarily engaged in selling food and beverages, section 67.1(1) applies and only 50% of the expenses incurred are deductible.

Say, you are buying a Home Depot gift card, for the purpose of earning the property income. As Home Depot is not an establishment that is primarily engaged in selling food and beverages, you should be able to claim the expenses 100% as tax deductions.

On the other hand, if you purchase a Tim Hortons’ gift card (restaurant) or a No Frills’ gift card (grocery store), you may spend $100, but you only get to deduct $50.  Only 50% is tax deductible. 

So… when you are selecting your client gift card to your clients this year, you know which ones give you maximum deduction!

Last tip, when you purchase gift cards as clients’ gifts, make sure that you document the person whom you give the gift cards to and their contact information.  In the unfortunate event of a CRA audit, you can be asked for the clients’ names and phone numbers.  

You can find out more about my favourite gift cards in the following video:

Oh and if you want to know “How to claim tax deductions with gift cards as landlord”, click here.

Until next time, happy Canadian real estate investment!

Cherry Chan, CPA, CA

Canadian Real Estate Accountant

10 Tax Deductions You Can Make As A Realtor

What tax deductions can you make as a Realtor? To understand Realtor Taxes we need to understand how realtors are categorized. Realtors, like many other professionals, can own their businesses or be hired as employees.  

When you are an independent realtor, you are operating a business. Operating a business means that you are allowed to deduct all reasonable expenses incurred for the purpose of earning the income, subject to some exceptions.

Tax deductions “general deductibility” rule

Canadian Income Tax Act allows Canadian taxpayers to deduct reasonable expenses incurred for the purpose of earning business or property income, subject to a bunch of exceptions of course. This means that as long as you’re able to establish the cause-and-effect relationship between incurring the expenses and earning the particular stream of income, you can potentially deduct the expense.

Next time, when you are incurring an expense which helps you earn property income,keep the receipt.

If you are unsure whether you can deduct certain types of expenses, compile all your receipts and at year-end have a conversation with your real estate tax accountant.  They will be able to tell  you if you can deduct these expenses, just as I advise my clients.

Earning your tax deductions

I always say that in Canada, you gotta earn your deduction. This means that, as a minimum, you need to keep receipts to support your expense deduction.

If you give a cash rebate to your client for a successful deal, document the name of the client, the address of the completed deal, and provide proof of payment. These are the details that CRA is looking for.

As a word of caution, credit card statements and bank statements are generally not sufficient to substantiate your claim.  

I talk about this and the 10 basic tax deductions you can make in this weeks video here

Top 10 tax deductions for realtors when filing realtor taxes

As a realtor, you incur many different types of expenses to generate income.  As mentioned before, the key to tax deductions is to establish a cause and effect relationship and you will be able to get some sort of deduction.

Some tax deductions realtors can submit

1. Meals & entertainment

To qualify for tax deduction (even 50% deduction), you’re required to incur the expense for the purpose of earning the business income.

So, if you take your clients out for lunch, that can be a deductible meal. However, if you take your parents out for lunch and they are not your clients, that lunch is not a deductible expense.

My book “Complete Taxation Guide for Canadian Real Estate Agents” here, explains this to you in more detail, giving you the best tips along the way!

2. Advertising/Staging costs

Any advertising costs incurred for the purpose of earning your business income and bringing in leads are tax deductible. 

This includes your website cost, website developer cost, hosting fees, web design cost, Facebook, Youtube, Google, Instagram and even Linkedin advertising fees. 

But make sure you have a conversation with your accountant who understands your individual situation as a realtor.

3. Insurance

Insurance expense is tax deductible.  If you have your own office space, you might also need to carry general liability insurance, which is also tax deductible. 

4. Brokerage fees and other related charges

Fees you pay to your brokerage to maintain your license are deductible. Typical charges include desk fees, transaction fees, split of commission, franchise fees, office administration charges, etc. 

5. Professional dues and Memberships

Professional dues and memberships include fees you pay to your board, license fees with the real estate governing body, and other professional memberships. 

6. Client rebates

Client rebates, common in the real estate business like all other expenses, incur for the purpose of earning the real estate agents income.  It is a way to secure business, and sometimes it is a way to say thank you to our clients. 

My book shows realtors the 2 different ways to issue a client rebate.

7. Referral fees

From the Income Tax perspective, as long as the expense incurs for the purpose of earning the commission income, you’re eligible to deduct the expense (subject to some exceptions). Referral fees are not part of the exception. 

8. Coaching, education, and conferences

Coaching costs are tax deductible expenses. Provided that they incur for the purpose of helping you improve your business income. 

9. Client gifts/Gift cards 

As a realtor you can file your client gifts/gift cards as tax deductions… if you can tie the client gifts to your commission income. Client gifts can include appliances. Make sure you purchase the proper gift cards to get the best deduction for your money. You can always read more in my book or schedule a consultation. Just make sure you talk to an accountant if you’re not sure the expense is deductible!

10. Subcontractors Assistants and Salaried Employees

My understanding from working with many realtors is that hiring an assistant can help you propel your business significantly.  I witnessed it first hand how my husband’s assistant helped him grow his team from two agents to four agents.  

From a tax and legal perspective, you can hire an assistant as an employee, or as a subcontractor.  

Hiring your assistant as a subcontractor loosely means that you’re hiring another business to do the work for you. 

Hiring someone as an employee means that you have someone full time dedicated to help your business.  

Additonal tax deductions …

11. Home office expense

You are eligible to deduct home office expenses as long as you meet one of the criteria below:

  • Your home office is the principal place of business; or
  • You use the space exclusively to earn business income and you use it on a regular and ongoing basis to meet your clients, customers, or patients

Now, let’s assume you qualify with one of the criterias listed above. What can you deduct?

You can deduct the following expenses:

  • Maintenance costs such as heat, home insurance, electricity, and cleaning materials.
  • Property taxes
  • Mortgage Interest
  • Home internet
  • Repairs
  • Capital cost allowance

If you rent, you can deduct rent.

You can deduct part of the expenses that are related to running your business. This can be calculated based on the size of your home office in relation to the size of your home.

12. Automobile expense

Deducting business use of automobile expense is allowed and often one of the most overlooked deductions.  

To properly count automobile expenses as tax deductible, the first thing you need to keep is an autolog. 

It is a lot of work to set it up right, but once set up and there is no substantial change in your business usage, you may be able to keep a smaller logbook in subsequent years.

Deductible automobile expense

In addition to your mileage expenses, you can deduct the following automobile expenses:

  • Fuel and oil
  • Interest
  • Insurance
  • License and registration
  • Maintenance and repairs
  • Any other expenses that are directly related to operating your vehicle (I usually include my 407ETR bill as other expenses)
  • Lease payment or capital cost allowance

The total of these expenses is then prorated based on the business use mileage or rental use mileage for deduction purposes.

To sum it up, the tax deductions you can make as a realtor depends on the different types of expenses used to generate income.  Establish a cause and effect relationship and you will be able to get some sort of deduction.

Until next time,

Happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA Your Real Estate Accountant

4 Factors to Decide Paying Yourself Salary vs Dividend from PREC

Now that you setup your PREC, should you pay yourself a salary or a dividend?

As we all know, Personal Real Estate Corporation is considered a separate legal entity.  PREC can own assets, buy real estate, owe liabilities, sign contract, 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’re three ways to draw out money from your personal real estate corporation

  1. Repayment of shareholder loan
  2. Salary
  3. 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

What’s the difference between the two of them?

  1. Salary is a deductible expense in the corporation and a dividend is not 

Let’s use an example to illustrate. Say 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 $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 equal the combined corporation tax and personal tax on the dividend of the same amount.  That’s called tax integration. 

  1. There’s an additional cost involved, such as CPP & EI 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 of 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.  

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 will be based on the amount of CPP you have contributed. 

  1. Salary can give you RRSP contribution room, qualify for financing & enable you to deduct childcare expense 

Although the costs seem to be higher with salary, there’re some other benefits from paying a salary.RRSP contribution limit is calculated as a percentage based on earned income. Salary is one of them but dividend isn’t. If you want to save money in your RRSP account, paying yourself via dividend won’t work.

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 and 

  1. 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 $1,245 employment amount as non-refundable personal tax credit. Self-employed individual are not eligible to claim this amount unfortunately. 

Calculated on the base personal tax rate, this is equivalent to $1,245 x 15% = $187 (in 2020) non-refundable tax credit.

Unfortunately, this isn’t available when you earn a dividend income.

Okay, it is not a simple answer, is it?

Speak to a professional accountant that knows your personal situation before deciding. Don’t forget to consider all of the above when you make your decision.  

If you ever need help, feel free to reach out to our team. 

Until next time, 

Cherry Chan, CPA, CA

Your Real Estate Agent Accountant

Building Your Real Estate Team: What I Learned From Finding A Live-In Nanny

Hello to all you real estate investors and real estate professionals,

I hope everyone had a wonderful Thanksgiving with their families this past weekend.

Robin and I were at the Rock Star Inner Circle Member Event this past Saturday learning about real estate investing with Fundrise and another 400 + hardcore real estate investors who attended like those from Douglas County CO. That’s what I like about real estate. There is just so much to learn and a lot of the time, it can be pretty interesting. Before I first started in this industry, like many people, I had a lot of questions I didn’t know the answers to. For example, I wanted to know what is cap rate? After doing some research and speaking to specialists, I can say that I feel confident in more than just the basics of the real estate industry, but I am always learning.

The event was amazing and informative as usual.

It was also announced that I will be hosting some free real estate accounting and taxation classes for Rock Star Inner Circle members very soon! Stay tuned for those dates and more details!

We started our week with a lot of excitement as we were preparing for Robin’s nanny to arrive on Tuesday from halfway across the globe. We made the decision to take over our friend’s nanny from overseas a few months back.

All of us were cautiously excited. After all, we had never lived with anyone before! We didn’t know if she would even like us. Our agent advised us not to notify the nanny ahead of time so she didn’t know she would be working for a different employer!

As Tuesday came, I was at a real estate taxation seminar with another 350 accounting professionals getting the latest tips on real estate taxation in the morning (I will publish these materials in a different post). Erwin and Robin were given the responsibility to pick up Carolyn, the nanny, at the airport.

She had no idea that we were taking over from our friend before her arrival. She was shocked to see Erwin and Robin. She insisted on talking to her cousin, who’s also a live-in nanny in Toronto, before coming home with us.

Upon completion of the morning seminar, I rushed over to the airport to meet up with them hoping to make Carolyn feel better. We had lunch together and like most people, Carolyn immediately adored Robin. But she was still scared.

We finally got a hold of her cousin. She spoke to Carolyn briefly and advised her to leave us immediately because Burlington was too far from her and she believed that she could find Carolyn another employer closer to Toronto. We did not expect this at all! I somehow managed to persuade Carolyn to come to our house, check out our place and stay until the end of the week, hoping that she would change her mind. At this point, I really did think we’d have to find an au pair from somewhere else but I remained hopeful, positive thinking reaps positive rewards.

We showed Carolyn our lovely home and our friendly neighborhood. None of which seemed to impress her. She was waiting to talk to her cousin again later that night. I guess Erwin and I didn’t have the warm and fuzzy feeling that we were expecting to give off. I was devastated because we planned our whole schedule around Carolyn’s arrival. And yet, she didn’t want to stay with us! There is no ‘plan B’!

Being someone who wants to have everything done yesterday, I immediately started researching for a new nanny who was already in Canada to replace Carolyn. Little did we know that there was high demand for live-in nannies in GTA. People are willing to pay a premium to hire someone immediately. Some people were offering 80% premiums just to get a line-in nanny as soon as possible. I was getting worried and started emailing everyone that had a posting online. After twenty emails and a few phone calls later, we were able to secure a nanny interview the next afternoon at our house.

We had a candid conversation with Carolyn the next morning. She expressed that Burlington was too far away from her cousin and she preferred to live closer to her cousin. There was no way of convincing her at this point. She was leaving us without even giving it a try.

It’s well within her right to choose who she wanted to work for. It was just sad for us that it didn’t work out with her. We took another morning off to take her to her cousin.

We interviewed Sharmein that same afternoon. She arrived with her aunt, checked out the neighborhood, toured around the house and her potential bedroom, met Robin and sat down with us to have a discussion. Erwin and I found Sharmein to be bubbly and easy going.

Within a few minutes after she had left, Erwin and I made the decision to hire her! We knew that the market for live-in nannies is tough and we needed someone right away. We like her because of her easygoing personality. She adores Robin and couldn’t stop talking about how cute she was, so Sharmein started this Tuesday.

What went wrong? What kind of lessons can we learn from this stressful situation?

  1. We listened to the wrong advisor. The original agent that we worked with advised us not to notify Carolyn in advance. The agent repeatedly expressed that she didn’t have any experience dealing with situations whereby the original employer decided not to take on the nanny. We ignored that comment and have now learned to always be open and honest with the people that you work with. If she chose not to work with us, we would have had a lot more time to prepare for a Plan B.

Make sure you find an informed and professional real estate accountant for advice! Many accountants or bookkeepers can do your tax returns, only few can do the tax planning, and even fewer specialize in the real estate industry.

  1. We didn’t have a Plan B. It didn’t even dawn on me that I needed a Plan B because we put so much reliance on one option.

Be aware of the risks and benefits of any tax planning or strategies you are getting yourself into. Ask as many questions as possible. Prepare for a Plan B.

  1. We didn’t know the market well enough. We didn’t even know that live-in nannies are in high demand.

Whenever we decide to make any new purchases, real estate or any other products, make sure you do your research, check your references with anyone on your team, meet with them and see if they can provide any valued tax planning opportunities to your situation.

Luckily enough, Sharmein, our new nanny, has now started and life can continue on as planned. It had been a stressful week but we finally got the right person on our team. Have you selected the right real estate accountant on your team yet?

Until next time, your real estate tax advisor,

Cherry

HOW TO RECORD A PROPER AUTOLOG TO MAXIMIZE AUTOMOBILE EXPENSE DEDUCTIONS

I had an excellent week up north at a friend’s cottage. She recently bought a cottage so that her kids, raised in the city, could get to enjoy the outdoor and not be afraid of bugs and snakes and turtles. ?

I got to slack off for a week (sort of) and now I am back to work!

Although it was a fun week, taking care of two kids full time was a lot of work. (Hats off to those who are full time moms!)

I have the same amount of respect for those people who work full time with young children at daycare. How do they even manage to get their kids ready, go to work (sometimes even overtime), cook, do all the housework, and still be a mom/dad at the same time?

My friend, Joanne, is one of those.

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She starts a regular day by getting her kids ready for daycare. She and her husband drop them off at the daycare and she takes the TTC to work downtown.

She doesn’t leave work until around 5 to 5:30pm and she takes the TTC home afterwards.

Once she gets home, she immediately starts cooking, feeds the kids and gets them ready for bed with her husband’s help.

She also started her real estate investing journey earlier this year. ? The two properties were just closed a couple weeks ago.

The day she was supposed to come to the cottage to join us, she was dragged behind to work from home so that she could finish the month-end. She didn’t arrive until late in the evening.

And yet, she is still feeling guilty. Feeling guilty for not spending enough time with her kids, not being around enough to look after their homework and play with them.

We are always critical of ourselves. Our brain is wired to be critical and to think of the worst case scenario first.

She may think that she’s not good enough of a mom. I personally think that she is a superwoman, same as all the men and women who have to take care of the families, full time or part time.

On to this week’s topic –

In one of my previous blog posts, I discussed how you can deduct automobile expenses against your rental properties.

Whether you are a real estate investor, realtor, work in sales or own your own business, you want to make sure you keep a proper autolog to keep track of your mileage.

This helps you support the automobile expense claim against the income you are earning.

To keep a full logbook, this means that you are required to keep the following information in your logbook:

  • Date
  • Destination
  • Reason for trip
  • Distance travelled

I have taken the honour to create a sample for your reference.

At the end of the year, you sum up the business use mileage, say 10,786km.

Business use % = 10,786km / (38,172km – 25,786km) = 87%

Therefore, 87% of your automobile expenses are deductible.

Yes, this is a big hassle to keep every single trip. The more you claim, the more documentation you are expected to keep.

And it doesn’t end here with the log book.

Other evidence including the following information are expected to be kept to substantiate the reasonability of your logbook:

  • Maintenance record/invoice that shows the odometer reading on your vehicle
  • Daily planner that shows addresses that you have visited
  • Receipts that show the date and purchase (such as Home Depot receipts, etc.)

And yes, your logbook would also need to be consistent with all other circumstantial evidence.

It’s a lot of work to set it up right, but once you set it up right and there is no substantial change in your business usage, you may be able to keep a smaller logbook in the subsequent years.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Tax Accountant

JUDGE PROVIDES INTERESTING COMMENTS DURING A COURT CASE ON UNREPORTED CONDO SALE

Kids are cute and unpredictable. But they’re kids only once.

I am not perfect.  I am far from perfect.

A client of mine and I were in a self-learning seminar earlier this week.  I shared part of my everyday struggle with the group.

At the end of the session, she said to me, “I didn’t know you still have so many issues and struggles to deal with.  I thought you and Erwin have figured it out!  I follow your blog every week and you seem so organized.”

The truth is – I am not.

I wanted to get up at 5am in the morning so I could organize my day and get ahead before everything gets too busy.

I put the kids in bed early, slept early, planning for a brand-new day.

Robin woke me up right at midnight.  I struggled to fall back asleep for two hours.  Just as I was about to fall asleep finally, she walked into my room staring at me by my bedside.

I asked her, “what’s going on? It’s bed time. Go back to sleep.”

5am came, she came over to my bedside again.  Once more, I sent her back.  She left and came back and said “mommy, but I am scared.”

I let her slip in my bed this time.  She cuddled with me and kissed me multiple times until we woke up.  

In the morning, I was lecturing her on why she shouldn’t wake mommy up in the middle of the night.  She’s 4.  She doesn’t understand the commitment I have during the day.  She looked down and uttered, ‘but mommy, I love you.’

It’s as if she’s telling me the reason why she’s waking me up at night was because she wanted to be with me.  

I feel so guilty and ashamed to be upset with her.

How can I be mad at a little girl who just wants to be with her mother when she sleeps?

Sometimes, no matter how much I plan, I can’t always have my way.  And my way is not necessarily better.

Having a productive morning does not trump cuddling with my daughter.

I didn’t have the most productive morning that day.  I didn’t have the most productive mornings for the next four days. Laziness and excuses kicked in.

Today, I woke up at 5:30am to write this blog.  I don’t have everything down.  I have something done, and I am striving to put everything in my life on autopilot.  

It takes time.  It’s a continuous improvement.  I have the vision and I am working toward it.  But please do not mistake me or Erwin as “perfect” or as “model” examples.  

We are just struggling the same way everybody else does.  

Everyone starts somewhere. ?

Onto this week’s topic.

Another court case (DaCosta et al. v. The Queen. Tax Court of Canada, November 24, 2017) came out late 2017 regarding unreported income on the sale of two condo units.

Two taxpayers, a grandmother, Cynthia, and a minor granddaughter, Denise, each purchased a condo unit under construction.

Cynthia, a real estate agent, sold her unit the same month as closing.

Denise sold hers the month after.

They didn’t report any of the income on their tax returns.  

If you’ve follow my blog long enough, you would have known that sale of a real estate property can be taxed either on the income account or capital account.

If it is taxed on the income account, it means 100% of the profit must be reported as income.

If it is taxed on the capital account, it means 50% of the profit are subject to tax.

Now, how do you determine whether the sale of a property is on income account or capital account?  CRA follows a bunch of criteria to make such conclusions. The duration of ownership, taxpayer’s profession, financing arrangement, etc. are all taken into consideration when such a decision must be made.

  • Both taxpayers owned the properties for barely a month or two.
  • Cynthia had been a real estate agent for 23 years at the time when the tax returns were filed.
  • Cynthia reported only $20,000 net income in her 2010 tax returns.  She had significant line of credits.  Denise made $7,000 income at the time.  They both showed that they had no financial capabilities to afford these units.

The judge ruled that the sale should be on income account.

It also didn’t help that the taxpayers did not hire any professional help.

Because they didn’t seek a legal representative, the judge felt that he should point out potential issues that were not addressed by the taxpayers.

  1. Denise was a minor at the time and 21 now.  The judge found that Denise relied heavily on her grandmother and her father (both are real estate agents) to guide her through the entire process.
    The judge pointed out that Denise could have raised the issue that Cynthia was truly the beneficial owner of the condo unit under Denise’s name.Hence, the tax would not have been imposed on Denise’s tax return.
    Cynthia, technically, would have been required to report the sale of Denise’s unit in her tax return, on top of the one in her own name.
    But the judge has no power to increase Cynthia’s taxable income.
    The Unit held in Denise’s title would not have been taxed at all.
    Interesting a judge would provide such comment. ?
     
  2. We mentioned earlier that Cynthia and Denise were in no position to qualify for mortgages.
    The judge raised a second issue that the beneficial ownership of the condos was not even disposed in 2010.  “The legal titles were merely transferred to close family friends in order to fool a bank into indirectly providing financing to Cynthia.”
    If the beneficial ownership was never disposed of, Cynthia and Denise were under no obligations to report the so called “sale”.  It would have been considered merely a legal title transfer.I thought these two points mentioned at the end of the judgement was very interesting.  These are not loopholes but rather comments based on the case evidence provided.

Lessons learned?

  • Hire a professional to represent you
  • Proper documentation must be kept substantiating your claim
  • Report your income!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant