Realtors are amongst the top earners in Canada and with record high commissions for the year 2015, being a realtor was very profitable. The property prices are so expensive in the GTA that it reminds one of #SanFrancisco. With the rise of property prices followed higher commission income which pushed many realtors into higher personal tax brackets leading to higher tax liabilities. Since RECO does not allow Realtors to incorporate their real estate business they are forced to collect cheques under their own names from their respective brokerages being hit with the highest personal tax brackets (46%+) #Yikes
There are many strategies that exist to counter these higher tax hits. Consider the strategy of incorporating a management company which would pay for all the advertising, gas, promotions and other eligible realtor expenses. This management company can turn around and upcharge the realtor from 5% to 15%. Since the management company will be eligible for the small business deduction the corporate tax rate will be 15.5% on all active income. The Realtor pays the management company for all the expenses incurred, this can effectively help reduce the Realtor's tax liabilities with an expense lift and shift #Strategy. There are certain details that must be followed in order to make such a strategy work and we can help you with that.
If you have a spouse or family member who manages your management company which is paying the bills and managing your overall business affairs you can pay them a management salary which would shift some income from your personal tax bracket to them. If the spouse has no other income for the year they can take out $35,000 of non-eligible dividends tax-free from the management company.
Vehicle mileage needs to be recorded on a daily basis. This is an audit area that is consistently checked by all CRA auditors to ensure that the mileage being deducted is being recorded correctly. Realtors tend to drive more during the year so the percentage of business kilometers driven in a year is quite high comparatively to other professionals. The management company can help adhere to these regulations by helping support the realtor with a correct recording of mileage. As a reminder, it is important to keep the date, time, the purpose of the trip, starting and ending mileage on a daily basis.
Realtors are also responsible for HST collection and remittance on a quarterly/annual basis. It is important to check if your accountant is not using the simple method of HST calculation which does not usually work well with realtor incomes. It is important to check if you accountant is taking the right ITC (Income tax credits) against your HST collection so that the correct amount of HST remittance can be calculated.
The Canadian taxation system is designed to give every Canadian the right to strategically do tax planning. Why not use the systems in place to help save you some coin? #TaxStrategies
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- Written by: Jag Bath