Tax Advice for Real Estate Agents in 2020
‘Real estate agents can pay much lower 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. 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 newspapers 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 Lowe 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.
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).
Whether you are starting out or a veteran in the industry, it’s never a bad time to do yourself a favour and speak with an experienced tax advisor, book a free consultation with us today.
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.
Document expenses thoroughly
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. There are a lot of great apps out there available for use on your smartphone that can help you track business expenses on the go (we use Expensify).