Tax savings strategies for Canadian real estate agents

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.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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