First things first. If you’re just starting out as a real estate agent, then that’s the perfect time to meet with a tax accountant. But, even if you’re an existing agent, it’s never too late to do yourself a favour and speak with an experienced advisor.
This is something so simple that you wouldn’t think it’s worth mentioning. Wrong! The reality is that we usually naturally get caught up in doing what we do best. In your case – selling homes. And it seems like the last thing you want to be doing is keeping track of your numbers.
Getting into the bad habit of being disorganized is a hard one to break and can be extremely costly. Not only do you need to know exactly what to track, you need to develop a customized routine. It all depends on your situation and what works best for you.
Document expenses thoroughly
The more proof and justification of the business nature of your expenses that you can provide, the better. Keep receipts! Make notes on the receipts regarding whether it was a gift, business meal, etc. If there’s any expense capable of being viewed as personal, make a note as to why it was actually business related. And remember, credit card statements are not enough to satisfy CRA.
HST you collect on your commissions is not yours
I’ve seen it so many times. People collect their sales and the related HST. Then it comes time to file their HST return and pay the balance owing. But they’ve already spent the money. Don’t get into the habit of spending the CRA’s money. It’s not yours. You’re simply holding it in trust for them and before you know you’ve got to pay them their share.
Real estate agents can pay a lot less tax – so long as they know the rules of the game.
Separate business and personal activity
Consider having separate bank accounts for your business and personal transactions. Should you ever have to provide supporting documentation, avoiding commingling of your activity will simplify the process.
You can use the business account to pay for all your home expenses (used to claim your business use of home office) and to pay your family members for casual labour (see income splitting section below).
Should you ever be audited by CRA, using separate bank accounts for business and personal transactions will also support your position that you are not trying to run personal expenses through the business. Trust me – you do not want CRA coming in, denying a large portion of your vehicle expenses, totally denying your business use of home office and arbitrarily denying a significant portion of your other expenses simply because you had a poor record keeping system. Yes, this happens.
Reduce your HST and income taxes owing
I’m sometimes shocked to see what expenses people aren’t claiming that they’re entitled to claim. But, I’m always more than happy to bring this to their attention to help them save a lot of money.
You need to know what expenses you’re entitled to claim. Put simply, you can basically deduct almost anything that’s business related. The expenses I most commonly see as being claimed incorrectly or not at all are business-use-of-home-office, gift cards purchased for clients and vehicle expenses. Then, of course, there are the expenses you have that are a combination of personal and business (e.g., cell phone, home phone and internet).
I’m sometimes shocked to see what expenses real estate agents aren’t claiming that they’re entitled to claim.
Advertising, promotions and gifts
This is a very generic type of expense and you have a lot of flexibility in what you can include. These expenses are fully deductible (not partially as with meals and entertainment). Most common items include newspaper and other advertising and gifts.
I recommend putting the names on the receipts for all expenses to justify the business connection. You don’t want to not do this and then have to subsequently rebuild the names from your diary and sales records.
Remember – gift certificates to restaurants fall under the 50% allowable provision, however gift certificates to, say, Home Depot or The Bay are 100% deductible. So, if you’re going to buy a client a gift certificate, it’s to your advantage to get them one for somewhere other than a restaurant.
Parking and 407 fees
Track these separately as they’re 100% deductible if they’re business related. If you don’t track them separately in your travel costs then you risk only claiming a percentage of them based on your business use of your personal vehicle.
Interest and bank charges
If you incur debt to help your business, track it and the related carrying charges separately so that you can deduct the appropriate amount.
The Income Tax Act imposes limits on the amounts you can expense regarding ‘passenger’ vehicles (i.e., automobiles which are motor vehicles designed to carry people on highways and streets and can carry a driver and no more than eight passengers). The limits are for both purchased and leased passenger vehicles and include maximums on the amounts you can claim, as follows:
1. Interest paid on a loan incurred for the purchase (i.e., $300 per 30 days or $3,600 per year);
2. Lease payments (i.e., $800 plus HST which is also pro-rated if the original value of the vehicle is in excess of $30,000); and
3. Capital cost allowance (i.e., tax depreciation is based on a maximum cost of $30,000 if your vehicle cost is in excess of that amount).
If you own a qualifying ‘motor’ vehicle, you’re not subject to any limits on the vehicle expenses you can claim. This virtually always results in significant tax savings.
However, ‘motor’ vehicles (i.e., automotive vehicles designed or adapted to be used on highways and streets) are not subject to the previously mentioned limits and include:
1. Van or minivan used to transport goods, equipment or passengers in the course of business and used 90% or more for business purposes;
2 Sport utility vehicle used to transport goods, equipment or passengers in the course of business and used 90% or more for business purposes;
3. Pickup truck with extended cab used to transport goods, equipment or passengers in the course of business and used 90% or more for business purposes; and
4. Pickup truck (seating 1 – 3) used to transport goods, equipment or passengers in the course of business and used 50% or more for business purposes
Having one of the above vehicles and claiming it properly can translate to thousands of dollars in tax savings each year.
It’s not uncommon for a real estate agent who owns two vehicles, is available for work seven days a week, does not use the vehicle to travel for their hobbies (e.g., ski or golf) and doesn’t travel to a cottage regularly with that vehicle to declare business use of their vehicle of 90% or more.
This is not something just available to real estate agents, but it’s something you might want to do to save yourself a substantial amount of tax.
Basically, if you have a spouse or child who earns less income than you then they’re going to be in lower marginal tax bracket. You can pay them a reasonable amount for services performed which will reduce your income and the amount is taxed in their hands at a lower rate.
If you keep these fees under $30,000 per family member then you avoid having to have them become HST registrants. This also can translate to thousands of dollars in savings.
If you’re going to pay your family members then you need to determine whether they’re employees to be put on payroll or paid as casual labour and therefore. If they’re not going to be put on payroll as employees then government withholdings and remittances (i.e., CPP, EI, income tax) would not be required.
Income splitting with family members can translate into thousands of dollars in tax savings each year.
But, it’s not that simple. Payments to family members are scrutinized more closely by CRA than amounts paid to third parties and therefore it’s especially important that you handle the transactions and relationship appropriately. The transactions have to be handled in a particular way and the amount paid must be appropriate for the services performed among other criteria for the expenses to be eligible.
Don’t forget to claim capital items (e.g., vehicles, laptops, printers, furniture and equipment) that you originally had as an employee elsewhere before you started as a self-employed agent. You can use the fair market value of the item at the time.
For almost all items costing $500 or less, you can claim them as 100% expense in the current year rather than claiming depreciation over several years.
Once you start actual self-employment then you need to use the actual specific cost of the purchases.
Generally, your previous year’s return is due April 30 of the following year. However, if you or your spouse or common-law partner is self-employed, your returns are due by June 15.
I always insist clients to still file by the April 30 deadline. The reason I do this is because if you have a balance owing for the year then it basically has to be paid by April 30 or you’ll incur interest charged by CRA. Do yourself a favour and file and pay on-time. Of course, making appropriate tax instalments throughout the year can help avoid any potential issues.
Apps for tracking business expenses
There are a lot of great apps out there available for use on your smart phone that can help you track business expenses on the go.
I personally use an app called Expensify. It’s great for tracking travel expenses and kilometers traveled and all the related details. You can use it to generate monthly reports with all the details you need. I strongly suggest you check it out.
Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.