Tax Savings Strategies for Real Estate Agents in Canada

Allan Madan, CA
 Dec 8, 2010
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This article discusses a unique tax saving strategies for real estate agents. If you are a real estate agent, then it is very important that you read this article.

As a real estate agent in the top income tax bracket in the province of Ontario, you are paying tax at a rate of 46.4%. Now, wouldn’t it be nice if you could incorporate and pay tax at a rate of only 16.5%?

“16.5% is the corporate income tax rate for small business corporations in Canada. Unfortunately, the Real Estate Council of Ontario (RECO) does not permit real estate agents to incorporate,” says Allan Madan, Accountant Mississauga, Toronto, Canada.

So how do we solve this dilemma? It involves a series of steps, including the use of a management company. This article will walk you through those steps.

Create a New Corporation – Tax Savings Strategies for Real Estate Agents – Accountant Mississauga

Step 1 – Create a New Corporation – Tax Savings Strategies for Real Estate Agents

The first step entails creating a new corporation that is owned by your spouse. The new corporation will perform managerial services including marketing, administration, accounting and other functions on behalf of you, the real estate agent.

The new corporation will charge a fee to you for performing managerial services.

Determine Expenses to Charge

Step 2 – Determine Expenses to Charge – Tax Saving Strategies for Real Estate Agents

The second step is to identify the types of expenses that the managerial company will pay for and charge back to you. The expenses that you would ordinarily pay for as a real estate agent and that would now be paid by the management company include:

  •   Advertising, Marketing & Promotion
  •   Supplies
  •   Staff
  •   Rent
  •   Telephone
  •   Computer charges and internet
  •   General overheads

The above expenses should be charged back to you by your spouse’s corporation at cost plus a mark-up of 15 to 25 %. An invoice must be prepared detailing the expenses and mark-up.

Charge for Labour Hours – Tax Savings Strategy for Real Estate Agents – Accountant Mississauga

Step 3 – Charge for Labour Hours – Tax Savings Strategy for Real Estate Agents

The third step is for your spouse’s corporation to bill you for time spent (on an hourly basis) by the corporation’s staff on administering the marketing, administration and other functions on your behalf. The time spent by your spouse should also be billed back to you.

Write Monthly Cheques to Management Company

Step 4 – Write Monthly Cheques to Management Corporation

The fourth step is for you (real estate agent) to write a monthly cheque to your spouse’s management corporation for the services performed that month.

For example, assume that the invoice totals $15,000 for the month. You (real estate agent) would receive a deduction for the $15,000 paid at a tax rate of 46.4% (marginal tax rate). Your spouse’s corporation will pay income tax on $15,000 received at a tax rate of only 16.5%. So you can see how we saved 30% of income taxes by simply using a management company structure.

It is very important that you have a management agreement in place that is drafted by a business lawyer and reviewed by a Chartered Accountant in Mississauga / Toronto / Oakville. The management agreement must comply with the Canada Revenue Agency’s guidelines and it must be able to withstand an audit by the Canada Revenue Agency, if an audit occurs. Please do not attempt to create a management company and management agreement on your own.

I hope you found these tax saving strategies for real estate agents helpful and will keep them in mind to make your investments more profitable.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 30

  1. Hi Allan, Is this legal? Has anyone been audited? I would like more information. How long have you done this. Wouldn’t this be considered tax evasion? Thanks

    1. Yes, this is certainly legal and is not tax evasion. Rather, it is sound tax planning. The management agreement should clearly specifies the services being provided by the management corporation. In addition, payment must be made monthly by the real estate agent to the management company. Third, the hours worked by the management company’s staff must be documented.

      We’ve been doing this for several years now. We have not encountered an audit. I have spoken to another mid-sized CA firm that have clients who have undergone audits, and they reported back to me that they have not encountered any major issues or surprises.

  2. I do not see how the new management company cannot be considered a personal services business, thereby making it inelegible for the small business deduction. This eliminate a vast portion of the savings, and when considering the additional administrative costs of the new co. there may be very little if any savings.

    1. Thanks for your question. The management company is not a personal services business, because it has the following characteristics:
      – bears financial risk
      – owns tools required for performance of services
      – is not under direct supervision of real estate agent
      – pays for expenses, equipment, and other costs

  3. While I understand that the corporation is a stand-alone legal entity, if the spouse incorporates a management company to mainly service the other spouse, CRA will not look at it and say NO NO because they are related and the transactions considered to be non-arm’s length?

    1. Hi Eric,

      If the management company is billing the real estate agent a reasonable amount, then the CRA will not disallow the deduction for management fees paid. The management fees paid must be supported by detailed invoices and a management agreement.

      Please feel free to contact us and provide us with further information so we can further guide you. Our contact details are on our website.

      Thank you !

      -The Team at Madan CA

  4. Interesting ang intriguing as I enter the world of real estate. I’m trying to wrap my head around this. Wouldn’t the tax savings be much less than 30% because the real estate agent will either have a tax deduction of 1) the actual marketing, overhead etc expenses or 2) these same expenses + the management fee? So wouldn’t the only savings be on the tax rate to the management fee? Thank you!

  5. Hi Alan, Can this strategy also apply to a person who owns several rental (residential )properties and they are all rented. Can the spouse of the owner of properties open a management company and pay all the bills like property tax, utilities, maintenance, mortgage etc form her company and charge management fee on monthly basis. My understanding is that its not advisable for husband to open the corporation and run this rental and sale/purchase business from the corporation. He is not a real estate agent by profession but works as a F/T employee making over 150K/year

    Thanks

  6. Hello Alan, Have you had any audits to date ? If so, were you able to defend this tax strategy ? Does you company offer the incorporation and management agreement required ? Thanks, Chris.

    1. Hi Chris,

      Thanks for contacting me. We haven’t encountered any audits to date with respect to this tax strategy. Yes, we can defend it. Yes, we can incorporate the company for you and prepare the agreement.

    1. Hi Herman,
      Yes, it’s possible from a tax perspective. BUT, will your spouse have time to operate a management company if he/she is already busy selling real estate? Note that a large portion of the management fee is based on labor hours spent by the owner-manager of the management corporation.

  7. Hi Alan,
    thanks for sharing this great info. I want to know why can’t the real estate agent incorporate a management company and employs the spouse as a full time employee who does the marketing and advertising? Is this strategy possible?

    1. Hi Nazia,

      If your spouse is working full time, then it will be difficult for you to prove that he/she is working a substantial amount of time for the management corporation. As such, this strategy is not recommended for you.

  8. “I note your question from Lisa in 2012 which was not answered. It seems to me to that Lisa is very insightful since she was just entering the industry.
    It somewhat relates to how I have been handling my expense. As a realtor for 10 years I have been paying my wife a salary for her real work for years. She does all the admin and is not licensed. I refer to her as my Unlicensed Assistant.
    How would her being a corporate owner be any different to us collectively. I deduct her salary and I deduct all the expenses. I already have a “”holding company”” from my previous life as a business owner. Today it holds my investments. I am the sole shareholder.

    So I have 2 questions:
    Could I bring her into the corporation or should I?

    How would the net tax benefit be realized.?”

    1. Hi Sam,

      “There are a few ways in which a management company can help save taxes:

      – A management corp pays a lot fewer taxes than an employee
      – CPP premiums are not payable
      – Management corp also earns a profit by adding a markup to expenses charge to the real estate agent”

  9. Hello, does this strategy only work with a spouse? Could this same strategy be applied to a trusted partner/significant other or what about a retired parent?

  10. hi allan,

    how real estate brokerage firm report split fee (COMMISION) on sale of a property on their tax return. Do they report whole amount of commission as revenue and deduct split fee given to the agent or simple add to the revenue split fee brought in by the agent

  11. Thanks Allan. Quick question. Assume I have an full time employment income and also a realtor. Now in case I dont earn any commission during the year, will this strategy still hold. Meaning no commission income, payment 46% tax on employment income. Will MSA reduce my taxable employment income (meaning will MSA be a deductible expense) thereby reducing overall tax rate on my employment income? So I will be paying for MSA from my FTE income.

  12. Hi Alan, three questions:
    1. Does this strategy still hold now in 2019?
    2. Can this strategy be applied to an employed mortgage broker that is paid 100% commissioned; whereby the spouses corp is providing marketing services
    3. As the spouse owns 100% of the corp, does the arms-length invoicing that is occurring poise any risk if its all papered up properly?

    1. Hi Amit,
      Yes, the strategy is still applicable for the 2019 year. It can be applied to the situation of an employed mortgage broker that is paid 100% commission income. A management agreement should be prepared with regular invoicing pursuant to the terms of the agreement. The CRA can challenge this arrangement on two fronts (a) The management fee charged is unreasonably high, (b) The management corporation owned by your spouse is operating in the capacity of an incorporated employee, in which case the management corporation will be deemed to be a Personal Services Business.

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