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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

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 …

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  1. 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 …:

  1. 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.

  1. 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. 
  2. 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. 

  1. 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.
  2. 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. 
  3. 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.

  1. 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.

  1. 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