During 2008, the Canada Revenue Agency (CRA) set up real estate audit teams in all of their District Taxation Offices to audit real estate agents. This was the result of a perception that agents kept bad records and were claiming excessive expenses for business dinners, gifts and other discretionary expenses and even deducting personal expenses as business expenses. We all know in the real estate industry - - our firm specializes in real estate - - that EVERY agent in Ontario is completely honest and professional. The problem is that the CRA audit divisions treat realty agents as common criminals assuming that all agents are cheating on their tax returns, claiming an unreasonably high proportion of vehicle expenses as business-related and engaging in a variety of dishonest practices in tax filings. CRA auditors WILL NOT be reasonable or fair on an audit and act in a fashion that is militant and unreasonable. A simple example is that the cost of all foodstuffs and drinks purchased for open houses will be disallowed as “groceries - personal expenses”. These expenses are 50% deductible as seen in our discussion of expense headings for our free column sheet. The CRA will audit the current tax year and the preceding tax year. Those audited this past fall and winter were likely having their 2006 and 2007 tax returns reviewed. By about July of 2009 once 2008 assessments are issued, the CRA will commence auditing the 2007 and 2008 tax returns.

A typical auditor will seek to disallow about 30% to 40% or more of expenses thus increasing net self-employed income to the extent of the expenses disallowed. Taxes increase accordingly as seen in the table below. It is not unusual for an agent to be reassessed for extra taxes payable for the 2 years reviewed for an amount in the range of $20,000 to $30,000 in taxes payable or even higher. There will also be GST reassessments for amounts owing equal to the GST included in the disallowed expenses. The mentality is that of a ‘tax grab’ - - put the screws to the agent. This discussion will assist agents in keeping better records, being better prepared for an audit and getting a good result if audited. Our firm expects audits to double or even triple in 2009 compared to past years. You are warned.

2008 TAX RATES &  BRACKETS

Your tax bill will increase after an audit based on the amount of expenses disallowed and how that will affect which tax bracket into which the increased income will fall. The highest earners netting much higher than the top threshold of the $123,184 for 2008 will be taxed at a straight 46.41% on all expenses disallowed. If $100,000 of expenses are disallowed for the 2 tax years under review, the tax bill will be $46,410 plus interest at the prescribed rates and possibly even penalties of a further 50% if the CRA concludes that an agent knowingly claimed non-deductible expenses.

Ontario has two levels of surtaxes plus a new amount payable entitled the Ontario Health Premium which was introduced on July 1, 2004 which is a flat levy of $300 for those with taxable income over $25,000 and rises by $150 increments to a maximum of $900 for those at the $200.600 income level and higher. With all this in mind, the approximate 4 tax brackets rates for 2008 for combined Federal/Ontario rates of taxation are approximately 21.05% up to $37,885; 33.3% up to $75.769; 43.1% up to $123.184 with a highest rate of 46.41% above $123,184.

CRA  INTEREST & PENALTIES

INTEREST. The CRA sets a quarterly prescribed rate at prime plus 4% for both personal taxes and GST.

PERSONAL TAX AND GST FILERS face a 50% penalty when installment interest exceeds $1,000 on the total of the interest figure.

LATE-FILING PENALTIES. On a first late personal tax filing there is a penalty of 5% plus 1% per month for up to 12 months - - a 17% maximum. On a second late filing within 3 years, the base penalty is 10% plus 2% per month for 20 months or a maximum of 50%. Regular filers have an April 30th tax filing deadline while the deadline for self-employed taxpayers including those with `sideline businesses’ and their spouses is June15th. This latter filing deadline also applies to annual GST filers. It is advantageous to `harmonize’ filing deadlines - - have the same filing deadline for taxes and GST - - as it reduces the amount of time spent on bookkeeping. Do your tax and GST bookkeeping at the same time in the first 3 – 4 months of the year-end. Many self-employed taxpayers who are GST registrants complete and file and pay the calculated balances by April 30th to avoid interest charges which commence running on outstanding balances on May 1st. Quarterly GST filers must also file within 30 days of the end of each calendar quarter and face penalties for late filings. If you are a quarterly or annual GST filer, you must enclose payment with your GST filing or it is treated as a late filing subject to penalties. This is not so with personal tax filings. Regular tax filers or the self-employed tax filers with a June 15th personal tax deadline are not subject to penalties on taxes payable if they meet the filing deadline. They pay only interest. So those who have June15th filing deadlines for both personal taxes and GST should pay the full amount of GST payable and then is much as they can, if not all, on their personal tax balance.

Under s. 238 (1) of the Income Tax Act, you can be prosecuted in the criminal courts if you fail to file a return after receiving a formal demand to file in person or by registered mail under s. 150 (2) and do not file within the prescribed time in the notice. You are liable, on conviction, to a fine of from $1,000 to $25.000 and imprisonment for up to 12 months. In the last 2 years, we have had taxpayers come to our firm facing this situation. It is a heavy-handed device by the CRA to force filing and is usually resolved by a quick filing of the return or returns demanded with the Assistant Crown Attorney agreeing to dismiss the charge(s). Our read is that Crown Attorneys are angry at this new extreme practice by the CRA and will lobby the Minister of National Revenue to instruct the CRA to cease and desist from laying such charges and to stop using the criminal courts to collect taxes. If you do not file after receiving the notice, you may be prosecuted. Our firm knows of only one incident where there was a conviction and that occurred when the taxpayer essentially told the CRA to take a hike when requested to file. Not smart.

Qualifying Expenses Under S. 18(1) of The Income Tax Act - - the “Business Connection”:

Subject to specific restrictions and limitations, the general rule for the deductibility of expenses to corporations or self-employed taxpayers is set out in s. 18 (1) of the Income Tax Act. Expenses are deductible if: “…incurred by the taxpayer for the purpose of gaining or producing income…”. This is referred to as the “business connection” test. The onus is on the taxpayer to show that any expense claimed was incurred to earn income. This is why you need to note names on gift, dinner and event receipts. If you fail to do so, you fail the ‘business connection test’ and the expense is disallowed. If you receive a CRA letter to produce “all bank records, an automobile logbook, ledgers and all receipts and vouchers for the 2007and 2008 tax years” you are being audited. Get advice at once and retain an agent to represent you. Money well spent.

Our firm has free computer spreadsheets available for download from our web-site for commission agents, fee-for-service taxpayers such as consultants, professionals and tradesmen and a third one for actors, performers and models. The first task in any bookkeeping is to distinguish between expenses with GST and those without. On the expense column sheets referred to, expenses not subject to GST are indicated with the second or middle column blacked out. This includes payments to banks, insurance companies, government bodies as well as those paid outside the country or for salary and such as casual labour where the recipient is not registered with a Business Number and charging GST. If you are audited on GST Input-Tax-Credits claimed in a GST filing, you will have the ITC disqualified where there is no GST number on the invoice for services yet GST was paid. A strict application of the law but typical of how unfair and militant CRA auditors can be. Expenses for real estate agents on their spreadsheet are discussed later by reference to the number for the specific expense named on the sheet:

Self-employed agents are not subject to Employment Insurance premiums. Federal and Ontario income tax and self-employed CPP premiums are paid on the installment basis. The good news is that self-employed agents may deduct any expense "reasonably connected to the earning of income". Claim all arguable expenses and don't blink if you are audited.

On starting self-employment, value furniture and equipment used for business and vehicles at FMV or at their Undepreciated Capital Cost (UCC) if deducted in prior returns on other than a self-employed basis and enter the amounts for depreciation. Claim the GST on the FMV, at commencement of self-employment, on furniture, equipment and on any car bought after 1990 in your first GST remittance. Mortgage interest, often your largest home expense, is deductible under the home/office deduction. This expense is pro-rated based on the area used exclusively for business or on a room-by-room basis not counting washrooms OR on a square footage basis WHICHEVER IS MORE ADVANTAGEOUS. The home/office expense must be carried forward once self-employed income is reduced to NIL. Agents in their first year of business might incur business losses which can be carried back 3 years for a refund on a prior return or carried forward for up to10 years.

Dinners and event costs have been only 50% deductible since February 22, 1994. Traffic tickets and moving violation fines even while incurred while working are not deductible after May of 2004 as the result of a specific prohibition enacted in the Income Tax Act. Cars purchased after 2001 are capped for depreciation purposes at $30,000 plus GST and PST - - self-employed taxpayers claim back the GST as an Input-Tax-Credit (ITC) in their GST remittance - - with a monthly lease cap of $800 plus taxes. Car loan interest is capped at $10 per day. The full GST may be claimed back on the purchase of a car and on all operating expenses - gas, repairs, lease etc. - if the car is used at 90% or more for business. If you drive only 89% for business you will get only 89% of the GST back.

S. 230(1) OF THE INCOME TAX ACT - “KEEPING ACCURATE BOOKS & RECORDS”

This section of the ITA is entitled “Records & Books” and is a little antiquated - - a typical audit letter from the CRA will refer to the need to produce “ledgers” which shows how this request has no relevance in the modern era of computerized bookkeeping software. The section reads: “Every person carrying on business … shall keep records and books of account … in such form and containing such information as will enable the taxes payable under this Act … that should have been deducted, held or collected to be determined.” Note that this requirement applies to personal and corporate income taxes as well as to payroll issues and even rental properties. There is a similar provision for collecting and remitting of GST which is governed by The Excise Tax Act. Note also that there is no reference in this general provision or anywhere else in the Income Tax Act to maintain an automobile log-book. [ See discussion below on deducting car expenses. ] For self-employed real estate agents - - referred to as “sole proprietors” or “independent contractors” - - revenues should be determined using the T4A slip provided by the broker or the annualized “Statement of Commissions and Expenses” provided by the broker. Expenses should be documented as to their nature and there should be proof of payment.

The annualized statement should conform to the T4A slip in terms of gross commissions and will also show any commission split to the broker as per the standard agreement called an “Independent Contractor” agreement which was adopted by the real estate industry around 1986 when agents commenced going off employee status to self-employed status. Many commercial real estate agents remain on employee status. That will be the case if they meet most of the indicia of an employer-employee relationship including: 1) working fixed hours, 2) working at a fixed location, 3) operating under a degree of supervision from the broker, and 4) the broker supplies equipment such computers, desks and office equipment. An employee situation is certain if the agent is provided a vehicle by the broker. Employees are governed by the more punitive rules for deduction under Section 8 of the Income Tax Act. Whether employed or self-employed, keep good records.

Points for keeping good records and protecting yourself if audited:

• Set up a business checking account and deposit all commissions, referral fees received from mortgage brokers and fees received for such as a tenant placement into a rental unit into the business account. Do not mix any personal income such as from cashing an RRSP or selling shares or any personal expenses or activity into the account - - known as ‘commingling’ business and personal activity.
• Pay all business expenses out of the account. This would include all house expenses or rent if a tenant if you are claiming a home/office expense which is the case with virtually all self-employed agents. The amount of the home used for business will be indicated in the breakout between personal and business usage of your home in your personal tax return. Pay your spouse from this account if they are on payroll as an administrative assistant or to your children if they invoice you for casual labour.
• Have any overdraft privileges and any money drawn on a line-of-credit set up on this business checking account. This will allow you to claim all bank and interest charges as fully deductible since they are against an account wherein no personal expenditures are commingled. Arrange to receive your bank statements as you can also pull out all interest and service charges from the bank statement. Request your cancelled checks as invoices might be misplaced and the check can serve as proof of an expense. E.g., a check for $525 noted by you as paid to “The Printing House – Circulars” will allow our firm to get the deduction on the basis that the nature of the expense and the name of the payee lead to the ONLY reasonable conclusion that the expense was business-related.
• The CRA routinely requests the bank records for your business and personal accounts on an audit. This is a new attack to purportedly identify undeclared income. We have to point out to CRA auditors that all payments made to agents go through their broker’s trust account and are totaled in a T4A slip and/or the broker’s annual statement. The request for the bank records for your personal accounts amounts to a CRA `fishing expedition’. If you have set up a business account as suggested here, we tell the CRA that we will not provide records on personal accounts as they are not relevant. This argument cannot be made if you have commingled personal and business activity or carried on business activity through a joint bank account with your spouse. You will complicate an audit and incur more time and cost if operating with a joint account or mixing personal items into your “business account’. More explaining to do.
• Document expenses thoroughly. The more proof, the better. If you use a credit card, keep the credit card `chit’ and cash register print-out if given. Note on the ‘chit’ or cash register tape the nature of the expense if it is a gift, business dinner, event or for any expense CAPABLE of being seen as personal in nature. The CRA will characterize as “personal” virtually every expense that could be seen as personal unless the business connection is noted. Also, the typical CRA auditor will attempt to disallow every expense where your only proof is a credit card statement. Our firm where get you gas, auto repairs and other obvious business-related expenses such as a payment to print shops if you have only credit card statements as proof of an expenditure. You WILL lose almost all other expenses as YOU will not be able to remember what the expense involved. That would include for flowers, gifts, dinners and anything that is CAPABLE of being seen as personal in nature.
• Get a credit card for your business account and then use that credit card exclusively for business expenses and use a second credit card exclusively for personal expenditures. CRA auditors will always try and argue agents are trying to run personal expenses such as wardrobe, gifts and dinners through the Business Statement. NOTE: wardrobe, dry-cleaning, cosmetics, hairstyling and vacation expenses are NOT deductible. Ignore any differne advice given to you by an accountant. The charge that you have mixed in personal expenses can be rebutted by providing the credit card statements for the card used for personal usage and showing personal expenditures in those credit card statements. This will knock the wind out of the CRA auditor who says that personal expenses are being disguised as business-related.
• The general rule is that the better, if not meticulous, proof of business expenses you keep, the better your expenses will hold up to challenge on an audit. The goal of CRA auditors is to attempt to disallow 30% or more of expenses claimed as non-deductible by reducing the business proportion of auto usage, unfairly disallowing the home/office deduction and disqualifying as many expenses as possible as “personal” or “not connected to business”. A tax grab mentality. Keep good records and aim to get from 95% to 100% of your expenses if audited. Even go so far as to maintain an automobile log-book but that is often more trouble than it is worth. [ See discussion below on auto expenses. ]
• Get into good record-keeping habits. This will allow you to claim every possible cent in your Business Statement and get you good results on an audit. Bad record-keeping will lose you a lot of money on an audit and turn the audit experience, which is inconvenient and time-consuming at best, into a financial nightmare.

AUDITS AND APPEALS

CRA auditors adopt an adversarial stance focused on disallowing expenses. You can appeal any reassessment internally within the CRA to the Appeals Division of the CRA using a very simple form called a Form T400A “Notice of Objection” stating facts and reasons for the appeal. You can then appeal the Appeal Division ruling to the Federal Tax Court which will involve great time and expense. Aim to get a satisfactory result after the first two steps of the CRA Audit then a reversal of disallowed expenses after submissions to a CRA Appeals Officer. The Audit Division is propelled by a mandate to reassess for large balances payable. Appeals Officer are more fair and better informed and routinely reverse 90% or more of expense disallowances by the CRA auditor.

For self-employed or regular tax filers who fail to file on a timely basis and get a notice to file in person or by regular mail under s. 150 (2) of the ITA, the CRA would formerly do a “notional assessment” by assessing you based on the gross commissions shown in Box 20 of the T4A slip prepared by brokers and the taxes and interest assessed will be based on the gross commissions with no off-setting expenses. There would often be a huge balance payable in such assessments. The practice at our firm was to immediately file a Form T400A objection to the notional assessments for the one or two years which were notionally assessed - - which stops the right of the CRA to attempt to collect on the reassessed balances - - then get the tax returns in damn quick. The filed returns would then be assessed along with the relevant late filing penalties and interest and the “notional” assessments would be disregarded. The notional assessments got the taxpayers attention. The CRA has gotten nastier and is now laying charges under s. 238 (1) which go to the criminal courts. This is like getting the taxpayers attention with a nuclear bomb. This is stupid and unfair and amounts to using the criminal courts as a collection agency for taxes. The lesson is that if you get a notice to file under s. 150 (2) to get the tax returns in ASAP.

If you keep good records, you are ready for an audit. The CRA can only re-open returns MORE than 3 years after the date of an assessment if there is proof of “negligence” in the more recent returns being reviewed. Our firm has never had the CRA earlier statute-barred returns beyond the three years in our 20 years of handling audits. The rule for deductibility is general in that an expense must be incurred for earning income. CRA auditors thus use general reasons for disallowing expenses. Auditors are pressured by their department heads to disallow expenses to assess for more taxable income - - a crude form of a `tax grab’. The other point about CRA auditors is that most have never practiced public accounting which includes preparing financial statements and preparing corporate and personal tax returns. Many CRA auditors also have only a little or no formal training in accounting or even bookkeeping courses. The end result is that these auditors have no real understanding of the realities of operating a business. About 99% of CRA auditors do not have even a rudimentary understanding of trade and industry practices in real estate sales. If audited, you should print out our detailed discussion of the expense headings in our spreadsheet and insist that the auditor read the discussion before commencing their audit.

Since the “business connection” limitation on expenses as set out in s.18 (1) of the ITA is general in nature, CRA auditors will cite general reasons for disallowing expenses. Auditors are often militant, unreasonable and unfair. Auditors are often unfamiliar with trade and industry practices for real estate agents. They do not know the difference between an `agent’ open house versus a `public’ open house. Reasons cited for disallowing expenses include:

• “personal in nature”. Any gifts, dinner and event expenses or purchases of flowers will be characterized as personal unless you notate the name of the client and, preferably, an address if a vendor or purchaser or even an address where an offer was made. Generally, CRA auditors will characterize as personal anything capable of being viewed as personal in nature. This why groceries for open houses are disallowed. Note the address of the open house and the date of the open house on such receipts and you will get a 50% deduction.
• “insufficiently documented” and/or “no proof of payment”. You need an invoice with a clear description of the type of product or service with a clear indication that payment was made. Credit card statements are not sufficient proof of an expense but since basic reasonableness is required of auditors our firm will always get the amounts for gas and car repairs but you are in jeopardy of losing the other expenses on credit card statements that are not backed up by the original credit card `chit’ or an invoice. Keep the credit card `chit’ and/or the cash register tape and note the nature of the expense and notate a name if the expense is a gift, business dinner or event expense. Your credit card statement should be only a fall-back or secondary form of documentation of expenses.
• A new attack based by CRA auditors being a variation of “insufficiently documented” relates to paying a business expense via automatic bank payments for such as car or computer lease expenses, your cell-phone and internet expense for Bell or Rogers, monthly car insurance, monthly flat-fee flyer printing and distribution etc. Keep the original contract and connect it to the automatic debit on your bank statement. CRA auditors will play stupid and say that the short notation that routinely appears in your bank statement is not sufficiently clear to conclude that it is business expense. This disgraceful practice is becoming more common on the part of auditors. Auditors will try and argue that expenses are not clearly of a business nature. Insist that the expense IS business-related. So deduct, don’t blink and fight for every expense.
• “not clearly connected to business”. This is a variation of the previous reason. It can involve an invoice or automatic bank payments. Where auditors can note that an expense is not clearly of a business nature - - the implication being it is capable of being viewed as personal in nature - - they will conclude it is personal in nature. This is common with such expenses as furniture for ‘dressing/staging’ of client homes or a chair bought for usage in your home-office area. Do not let an auditor bully you out of a deduction.
• They will try to disallow a home-office expense in virtually every audit. [ See our discussion on this expense in our discussion of our spreadsheet. ] Our firm has never lost the home-office deduction in over 20 years of representing real estate agents on CRA audits.
• CRA auditors will propose to reduce the business proportion of car usage by 20-25% based on your failure to provide an automobile log-book. Claim 90-95% business usage and be prepared to concede only 5% of business usage on an audit. In our discussion of our spreadsheet and the car expense, we point out that the Qureshi decision stands for the proposition that you do not have to maintain a log-book. In the almost 2100-page long Income Tax Act, Regulations and Articles, there is not a single mention of an “automobile log-book”.

On a typical CRA audit, auditors will try to disallow 30% or more of your expenses for the typical 2 tax years being reviewed - - usually the most recent tax filing plus the prior year filing. Aim to maintain 95% of expenses or more and keeping good records guarantees such a result. The onus is on you to relate expenses to the earning of income. That means names on gift and business dinner or event expenses to meet the ”business connection” test. A CRA audit could lead to three results. The first result involves the disallowance of expenses and addition of undeclared income which results in you being reassessed with a higher net income in the tax year(s). You will be reassessed for additional taxes and interest payable based on the 4 tax brackets for personal tax filings. For example, a taxpayer already at $150,000 net self-employed income before being reassessed for a higher net income as a result of a substantial disallowance of expenses will pay 46.4% on the additional income plus interest at the rate of prime plus 4% which rate is prescribed quarterly by the CRA. The second consequence of an audit is that you may be reassessed penalties of up to 50%, upon which interest will be added, if there is a finding that you “knowingly” or through “gross negligence” failed to declare income or claimed expenses which you ought to have known were not deductible. The penalties are in addition to reassessed tax payable. The third scenario, is a finding by the CRA that you have filed a “false or deceptive return” which can include deliberate non-declaration of income, destroying or altering records, making false or deceptive entries all for the purpose of evading taxes. You might face prosecution in the criminal courts and, if found guilty beyond a reasonable doubt, face penalties of from 50% to 200% of the tax evaded and up to 2 years in jail. [ See our extensive discussion on penalties below. ]

You should provide to Canada Revenue Agency (C.R.A.) auditors only documents specifically requested although you cannot be seen to obstruct them. A fine line. This explains the earlier detailed discussion on maintaining a separate business checking account into which all commissions should be deposited and all business-related expenses paid. Never let them interfere with your business operations. You can insist that they review your receipts and vouchers at the office of your tax preparer or authorized agent. Our firm has two areas reserved for usage by CRA auditors reviewing taxpayer records. If you use our computerized spreadsheet, the auditors will compare the expense receipts and vouchers to your column entries which you can print out from the software. At a minimum, CRA auditors will insist on calculator tapes attached to each batch of expenses such as gas, office supplies, business dinners, advertising and promotion etc. If you fail to use a spreadsheet or calculator with a tape when you total your expenses annually, you will have to enter them in the column sheet or provide calculator tapes for each expense heading if audited. CRA auditors will not accept expense receipts which are not totaled in one of the two ways described. This is reasonable as they should not be expected to do your bookkeeping for you. You do not need to keep ledgers. That is an old term from the age before computers. Only registered charities and publicly-listed companies need records and returns prepared and audited by C.A. firms.

Keep business records for 6 years. Retain and authorize a professional agent to act on your behalf on a CRA audit. The CRA can audit a return only up to 3 years from the date of an assessment unless you sign a document waiving the 3-year limitation. NEVER sign that document unless you obtain professional advice to do so. Lacking a waiver, the CRA can go beyond the 3 years only in cases of non-declaration of income, falsified expenses or of "misrepresentation" which may include carelessness. Our firm has never had a taxpayer reviewed beyond the 3-year period. Statements about driving habits, hobbies, business practices, etc. will commonly be interpreted prejudicially to you. You might be asked to produce an automobile log book but you can make representations to support the proportion of business usage claimed despite not having a logbook. The Qureshi case is discussed under the Auto Expense for realty agents - - expense heading #23 - - and that case stands for the principle that it would be an “onerous burden” if the provision on maintaining books and records was interpreted by the courts as requiring the keeping of such a logbook by self-employed taxpayers who do a very large number of daily trips related to business and where almost all driving is business-related. Be prepared to give an extensive and detailed description of your driving habits to establish that 90-95% of your driving is business usage.

You will be asked to produce receipts/vouchers - - categorized and totaled - - for all items on the T2125 “business statement” on your tax return. Self-employed agents who have a room OR area used exclusively for business get a home/office expense as of right. Your home simply needs to be your “primary place of business”. Again, see the discussion on the home-office expenses for real estate agents which is expense heading #25. The requirement to meet clients at home on a “regular basis” only applies to self-employed taxpayers who pay commercial rent and want to take an additional home/office expense. We call this the ”lawyer/doctor rule”. These professionals rent commercial space and they can claim an additional home/office expense only if they meet patients or clients at their home on a ”regular basis”.

PENALTIES ON AUDITS

On a CRA audit, you can be penalized up to 50% under s. 162 (2) of the Income Tax Act which is entitled “False Statements or Omissions”. The section covers taxpayers who: “…knowingly, or under circumstances amounting to gross negligence..” falsify records or tax returns. The penalties can be imposed by an auditor and might stand up through an internal appeal to the Appeals Division at the CRA and even once you reach the Federal Tax Court. The evidentiary test is a “balance of probabilities”. Some protection comes from the onus of proof. Section 163 (3) reads: “…the burden of establishing the facts justifying the assessment of the penalty is on the Minister.” For the latter, read the CRA. In over 20 years, our firm has never had a client subjected to the 50% penalties. We always blame the accountant and argue that the mistake was a `third party error’ of which the taxpayer had no knowledge or any involvement.

The worst case scenario is to be prosecuted in the criminal courts which can occur with the simple non-filing of a return or the falsification of records or filing of a false tax return. The standard of proof is that of “beyond a reasonable” doubt as seen on T.V. and in the movies. Under s. 238 (1) of the ITA, you can be fined from $1,000 to $25,000 and be sent to jail for a term not exceeding 12 months. These charges are very, very rarely laid and only occur when it is clear that the taxpayer employed a scheme to evade taxpayers by concealing income or did such as create a false invoice for a non-existent expense. You know who you are. These penalties are in addition to the 50% civil penalties levied by the CRA. In such cases, the taxpayer may be charged in the criminal courts under s. 239 (1) of the ITA which will get you in the criminal courts on a summary conviction charge and subject you to fines of from 50% to 200% of the taxes evaded and up to 2 years in prison. A 2-year sentence will put you in the federal prison system while 2 years less a day or a lower sentence will put you in the provincial prison system. This charge relates to making a “false or deceptive return” where a taxpayer: “…destroyed or altered records to evade tax, made false or deceptive entries…” or “…willfully evaded or attempted to evade taxes”. Remember, this is how the F.B.I. in the U.S. got Al Capone. A famous case of the Supreme Court of Canada reads: “…it is the right of every taxpayer to aggressively attempt to minimize taxes.” ( Our Emphasis ) If the Justices of the S.C.C. had added one sentence, it would have read: ” But don’t cheat.”.

The courts have consistently looked upon the invocation of penalties on the part of the CRA as penal in nature and are extremely reluctant to let penalties stand and thus have imposed a strict interpretation of subsection 163(2) of the Income Tax Act thus limiting the power of the CRA to levy penalties. (See Maatouk v. The Queen, [1998] 99 DTC 230 (TCC) and Carlson v. The Queen, [1998] 2 CTC 2476 (TCC). Penalty provisions in commercial contracts are routinely struck down by all courts in Canada including the Supreme Court of Canada, except in the most extreme and rarest of cases, such as construction deadlines where time is perceived of as of the essence. This position of all including the highest court in Canada places a heavy burden on the CRA and requires that the CRA find a high degree of blameworthiness on the part of the taxpayer which goes beyond negligence or carelessness. (See Fortino v. The Queen [1996] 97 DTC 55 (TCC) and Contomis v. The Queen [1995] 95 DTC 511 (TCC)). In order for the CRA to levy 50% penalties the onus is on them to establish that there is gross negligence or fraud and that the taxpayer acted knowingly with an improper motive and intention or acted with wanton disregard for the law. Anything less than such a finding, or if any reasonable interpretation of the facts favors the taxpayer, results in penalties being inapplicable. This is clearly set out in the Venne decision discussed below.

The Federal Court of Appeal has consistently adopted a strict interpretation of the penalty provisions in the ITA. It has narrowly and strictly interpreted the definition of gross negligence, to be applied in determining whether penalties are applicable, as going far beyond the failure to use reasonable care. The test for re-opening returns beyond the statutory 3-year period is the much looser test of “simple carelessness” which sets a comparatively low threshold for the CRA. The courts have shown that the test for invoking penalties should be set at the highest threshold with the onus on the CRA and virtually allows penalties to stand only in the case of clear fraud or where there is seen to be a high degree of negligence tantamount to intentional acting in complete disregard of the law. (See, Findlay v. The Queen, [2000] 3 CTC152 (FCA)). In fact, this Court has circumscribed the applicability of penalties by consistently holding to the position that penalties must be reserved to situations where the facts do not allow for a rational interpretation favorable to the taxpayer. ( See Baynham v. The Queen, [1999] 1 CTC 87 (FCA)). A penalty may be imposed only where the evidence clearly warrants it and where the evidence is consistent with both the state of mind justifying the penalty and, absent proof of that state of mind, the benefit of the doubt must be given to the taxpayer. (See, 800537 Ontario Inc. v Queen [2004] GSTC 399 (TCC), appeal dismissed [2005] GTC 1553 (FCA) and Farm Business Consultants, Inc. v Canada [1994] 2 CTC 2450 (TCC). So if one can conclude both a wanton disregard for the law or some innocent explanation short of the high threshold to be met by the CRA, then no penalties can be imposed.

This strict approach to the applicability of penalties has been consistently followed by lower courts. One broad principle that has emerged from these cases is that courts are reluctant to sanction the imposition of penalties unless there is a degree of negligence shown amounting to gross or wanton negligence. ( See 410812 Ontario Ltd. v. Canada [2002] TCJ No. 176 (TCC)). Courts have routinely held that lack of care, naiveté, or seeking a tax benefit is not sufficient to establish the validity of penalties. (See Robichaud v. Queen (2004), [2007] 2 CTC 2165 (TCC)).

Furthermore, the Courts have also made it clear that the failure to keep adequate books and records is not evidence of gross negligence and will not justify the invocation of penalties. (See Hsu v. Queen, [2006] GSTC 70 (TCC)). Even where the amount of unreported income is substantial, the conduct of the taxpayer is not necessarily grossly negligent justifying the invocation of penalties. (See Hyndman v. Queen (2004), [2005] 1 CTC 2088 (TCC)). Courts have saddled the CRA with a stringent onus and even where the taxpayer’s returns were found to be a “work of fiction”, the CRA’s burden to justify penalties remains onerous and penalties will not stand. (See Hans v. The Queen (2003), [2004] 1 CTC 2078 (TCC)).

The leading case on the applicability of penalties is Venne v Queen [1984] 84 DTC 6247(TCC). In that case, the court held that the taxpayer, who failed to report mortgage interest payments received based on the advice of his bookkeeper, should not be assessed penalties as this clearly was not an act of gross negligence. The court refused to apply penalties even though it noted that the taxpayer’s misrepresentations of amounts in the returns were attributable to neglect and despite its view that the taxpayer failed to exercise reasonable care in filing his tax returns. Notwithstanding the apparently egregious actions of the taxpayer, the Court held that the Crown failed to establish that the taxpayer knowingly made false statements in his returns. The onus on the CRA before penalties may be levied is very high and remains high even in the face of extreme misconduct on the part of the taxpayer. This case should be provided to an auditor when they mark a large “P” beside an expense disallowance. That notation means that they are invoking their 50% penalty. Our firm ahs cited the case law to auditors, explained the high threshold of proof set by the courts, and in every file, succeeded in avoiding penalties.

On a similar vein, the Courts are loathe to attribute the gross negligence of an agent to the taxpayer. The penalty provisions of the ITA require evidence of deliberate and intentional consciousness on the part of the taxpayer. Liability for penalties is not established by a lack of reasonable explanation by the taxpayer or agent. The taxpayer does not need to justify their position when mistakes are found. ( See Udell v MNR.) The Courts have gone so far as to make it clear that in certain cases, if there is any blameworthiness, it will be first be attributed to the agent or professional rendering services to the taxpayer which will negate the basis to validate penalties against the taxpayer. ( See Cipollone v. Canada (1994), [1995} 1 CTC 2598 (TCC).

An assessment or reassessment of a personal tax return may be appealed using a standard T400A "Objection" Form and of an assessment or reassessment of a GST return by filing a GST 159 “Notice of Objection (GST/HST)”. An appeal of an assessment of a current personal tax return must be filed within 1 year of the regular filing deadline of April 30th. An appeal of a reassessment of a return preceding the current tax year must be filed within 90 days. Audits as well as appeals from assessments and reassessments are dealt with locally at your District Tax Services Office in your area. You have an automatic right of appeal which will be handled in a relatively summary and inexpensive manner. Your problem gets very expensive with potential lawyer's fees only once you lose an appeal of an assessment or reassessment. You are then in Federal Tax Court.

HEADINGS IN OUR COLUMN SHEET FOR SELF-EMPLOYED AGENTS:

2. Broker Administration Fees. This is a `basket' heading. It includes all monthly fees, desk fees or any other charges. Break out the broker split of commissions IF it is included in Gross Income in a T4A slip in Box 20 as “Commissions”. If your broker does not provide a T4A slip, use the annualized summary of commissions and declare as gross income the full 100% of commissions before `breaking out’ the contractual portion of commissions due to the broker. So if on a “90/10” commission split, and the T4A Box 20 includes the full 100% Commission, the first deduction to claim is a “Broker Commission Split” of 10%. If the T4A does not include the broker share of commissions, you can only deduct expenses “passed through” to you by the broker. Such expenses include an agent’s share of a major newspaper advertising. This will be the case for EVERY expense paid by the broker on the agent’s behalf which is then BILLED to the agent. In a “Statement of Commission and Expenses” prepared by virtually every broker. Deduct the full amount in the broker statement under this heading and DO NOT break it out to the headings number 3 and on. Our firm enters the expense under “Realty Broker Administration Fees” and uses the specific amount noted by the broker as paid for expenses and the specific amount of GST paid by the agent during the year. Some expenses include GST while others are not subject to GST. Examples of the latter include E.& O Insurance, Provincial Licence Fees, Insurance costs, Government fees and banking and interest costs including any interest costs such as fees charged by the broker if they advance money on commissions. The rule is that the broker statement serves as your receipt so leave the figures for the total for expenses paid and GST paid intact. The broker keeps the receipt for these ‘pass-through’ expenses so the broker statement serves as your receipt. Easy!

3. Accounting & Legal Fees. All professional fees including bookkeeping, tax preparation fees and legal fees where a lawyer’s services might ne needed on the legal aspect of a sale. This occurs on complex issues such as how to allocate GST payable when involved in the sale of a “divided-usage” asset such as a property zoned and used for both commercial and residential purposes. The residential component is exempt from GST. This might include a mortgage discharge fee paid by you at the request of a client but such an expense could as easily be entered under the “Advertising, Promotion & Gift” heading. Do not agonize over semantics. Put it in a heading that is comfortable for you but do not make the mistake of putting an expense like a business dinner or event under the advertising heading at full deductibility when the ITA S. 67.1 (1) limits such expenses to 50% deductibility. See the discussion on the Stapley decision under the dinner/event heading. Professional fees paid for audits and appeals at CRA District Taxation Offices or for full appeals to the Federal Tax Court may be deducted under this heading but, more properly, should be deducted at Line 232 of your personal tax return under “Other Deductions” and the specific heading “Legal and Accounting Fees”. The end result is the same.

4. Advertising, Promotion, Gifts. Any expense is fully deductible. This expense heading should include all promotional expenses such as newspaper and other advertising, circulars, gifts including cash gifts, giveaway items and distribution costs paid by you to third parties other than the broker. Fees” below. ] You should put names on all gift, dinner and event expenses to make the `business connection’ and do it when you pay the expense. If you don’t do so and get audited, you will have to rebuild the names from your diary and trade record sheets to enter on the receipt before submitting your receipts and vouchers to the auditor. The rule is, no name, no deduction. The Stapley decision held that gift certificates to restaurants and events was subject to the 50% limit for deductibility. Certificates for The Bay or Home Dept would not be caught. Some auditors are limiting gifts of bottles of liquor and wine to the 50% limitation. Claim them under gifts as fully deductible as the law on such items is not yet clear. When in doubt, deduct.

A common expense, not understood by CRA auditors, is that for “dressing or staging”. This relates to purchases and such as storage and moving/cartage costs for items to be placed in more expensive homes to `dress them up’ to be more presentable to purchasers. If you buy furniture, rugs, carpets, art etc., any item over $500 should be capitalized under our expense heading # 24 to Class 8 for “Equipment & Furniture”. For purchases under $500 enter them under this advertising/promotional heading for full deductibility. Any cartage costs for these items, to and from your home or rented storage space, even if for more than $500, should be entered here for full deductibility.

5. Conventions, Seminars, Training. The general rule on the part of the CRA which we believe is reasonable restricts an agent to 2 conventions per fiscal year. The costs of 24-hours every 2 years RECO Continuing Education courses is not caught by that restriction and those costs may be entered here and are fully deductible. Often the broker pays for those courses and passes the cost through to the agent in which case it will be included in the “Real Estate Broker Administration Fee” under expense heading 2. Deduct under this heading the costs of any of those courses that YOU pay which would always be the case for such courses taken by you on the internet. Regarding conventions, pick the better ones held in Vancouver or Los Angeles if your international broker or someone in the industry such as a bank is putting it on. You can get the convention deduction plus airfare, hotel and one-half of your own dinners as a deduction. Note your own meals during a conference are better entered under our expense heading 14 “Travel Dinners” which includes your meals when you are more than 12 hours away from your “regular place of business” which we interpret as travelling outside the GTA area overnight. If you attend a conference in Vancouver and then take a 1-week vacation side-trip to Whistler, keep the receipts for the rental car, hotel, meals etc. to show a CRA auditor that you did NOT deduct them in your return as they were personal in nature. Have fun with the limitation. Special Training such as “Robbins” or any other extensive and popular sales training courses go here. We have gotten payments of $10,000 or more here for our clients on audit even when the CRA tried to apply the Section 67 limitation that an expense be “…reasonable in the circumstances.” The CRA can use the test to challenge almost any large expenditure but if it is incurred for business, deduct the expense and be assertive if audited. WE routinely get amounts of $10,000 to $18,000 paid for such training allowed on a CRA audit by showing that there was a substantial subsequent increases in commissions to say it was money well spent. We have also succeeded in preserving these large expenditures by arguing that they are part of “trade and industry practice” and specially tailored for real estate agents. We have never lost this expenditure on audit when challenged by the CRA.

6. Delivery, Courier, Taxis. This heading is self-explanatory. Note the business connection on the receipt such as “Delivery of Agreement of Purchase and Sale for Signing” etc. Again, every extra detail helps.

7. Dues ( TREB, OREA etc.) and any other professional organization fees which include GST. Leave these expenses under “Broker Administrative Fees” if paid by the broker and billed to you. Recreational club membership fees including curling, health clubs and golf fees are strictly disallowed. You can deduct visitor green fees and business dinners at your golf club subject to the 50% rule if you keep clear itemized records of such expenses.

8. Entertainment & Meals: at 100%. Enter the full amount of each of these expenses in the appropriate column. The spreadsheet will then break out 50% of the GST component as a cash credit in the form of an In-Put Tax Credit (ITC) in your GST filing. The reminder of the expense including the ½ of the GST expense not claimed as an ITC is then halved for deduction purposes in your tax return. ( In other words the column sheet `adds back’ in to the expense the GST not claimed for refund purposes in your GST remittance.) The costs of business dinners, cultural and sports events and groceries and drinks bought for open houses have been restricted to 50% deductibility since Feb. 22, 1994 under S. 67.1 (1) of the ITA. The Stapley decision of February 2006 ruled that gift certificates to restaurants and events were caught by this provision and subject to the 50% deductibility limitation. Give gift certificates to Home Depot or the Bay but avoid those for restaurants or events. The CRA has not yet tried to apply the s. 67.1 (1) limitation to LCBO or BEER Store purchases if gifted to a client so continue to enter those expenses under heading #4 as “Gifts” for a full deduction. NOTE: the ‘business connection’ test requires all employed and self-employed agents to put a name and address - - where bought, sold or an offer tendered - - on all dinner, event and gift items. Make the notation on the credit card chit and/or invoice from the venue, store or restaurant at the time of purchase to be smart. If you do not and are audited, you will have to engage in that exercise relying on your diary, trade record sheets and memory which can be a grueling task.

9. Equipment Rental/Short-Term Auto. For such expenses as leases of computers, faxes, phone systems, furniture and other equipment used directly in the course of your business. Short-term car rentals - - a day up to a month or more - - may be deducted in their entirety so long as the vehicle was needed to continue your real estate sales.

10. Office Supplies, Postage etc. This is another `basket' category which includes all the obvious expenses and anything that might not fit elsewhere. Use this heading for computer, software, furniture and equipment expenditures under $500 including taxes. You get full deductibility under this heading whereas a capital expenditure over $500 will result in a deduction of only one-half of the normal rate in the year of purchase - - the “half-year rule”. To illustrate, a $3,000 Class 10 computer purchase with a rate of 30% for that class will give you only a $450 Capital Cost Allowance deduction in that year - - ½ of 30% of the cost. Thus $450 of the $3,000 in the first year then 30% of $2,550 or $765 in the next year, then 30% of $1,785 in year 3 etc. This is how the “declining balance basis” is used under depreciation rules for capital expenditures.

11. Parking and 407 Fees. Are 100% deductible. This includes single parking fees, business parking paid on a monthly basis at your broker’s place of business, or for Highway 407 usage related to business. Remember our rule that agents work on 24/7 basis. Be aggressive. Residential tenants who pay a segregated parking cost should pull that amount from the amount for residential rent entered for the "Home/Office" calculation and enter it in the detailed auto calculation headed “Parking - Apartment”. This will give you a 90 to 95% deduction under the auto heading versus a 20% deduction if one-fifth of your apartment or condo is used for business under the home-office calculation. Downtown apartment parking can be $125 to $200 per month but it will be ‘buried’ in your rent payment. Break it out and enter it under the area for vehicle deduction. NOTE: Parking tickets or moving violation costs have not been deductible since May of 2004 after the Income Tax Act was expressly changed to prohibit deductibility of fines/penalties even if incurred in the “course of business”.

12. Subcontract & Consulting Fees. These include payments to anyone doing business and charging GST. It includes invoiced services such as the `computer guy', a promotion/advertising consultant and even a fellow agent who bills you for covering an open house or whom you pay when a commission is split and the full amount is declared in your Gross Commissions. We enter the latter as a “Sub-Commission” in the tax return which signifies that you made a payment to another agent. Enter the amount split out of your gross commissions and paid to the other agent by you.

13. Tel., Cellular, Internet, Website, Home L.D. Segregate out the business long distance charges on your home phone and claim the full cost of fax/internet and dedicated business lines. The basic cost of your residential first telephone line is treated as personal and non-deductible. Our firm deducts a figure of $30 a month or $360 as year from the annual total for telephone, extra features, internet, long distance etc as a tip of the hat to this CRA rule that the cost of your first telephone line at home is deemed for personal usage and on-deductible. Some agents rely solely on their cell-phones and have no telephone at home - - they are probably unmarried with no children - - and can safely argue their full telephone costs are deductible and any personal usage is inconsequential for an agent working 60- to 80-hour weeks in real estate.

14. Travel: 100% of Meals. You must be 12 hours from your "regular place of business" such as the GTA. This expense refers to your own cost of dining. You need not be with a client. Enter the full amount in this column and the software will break out ½ of the GST as an ITC and limit deductibility to 50% as with business dinners and events.

15. Travel: 100% Hotel/Fares/Cleaning. As above, you must be 12 hours away from the GTA but these expenses are fully deductible. The costs of your two allowed conventions each year should not be entered here. Deduct air fares, hotels, car rentals where you are out of the GTA - - Hong Kong or London, England or even London, Ontario will do - - if you stay overnight to meet with clients or scout for rental properties and homes suitable for purchase by your clients as their residence. Note the purpose of the trip in your diary to make the “business connection”.

16. You can modify this box for other GST-Included Expenses. Enter anything not expressly covered elsewhere but keep records and name the box so that you, your tax preparer and a CRA auditor will see the business nature of the expense. Some use this box for those expensive personal training expenses they contract for.

17. Interest & Bank Charges. Where you have set up a business checking account and draw on lines-of-credit directly into the account to ensure full deductibility. Deduct such all bank service charges/fees and over-draft interest costs. This is also the column where you should enter all fees and interest charged on brokered commissions - - where you borrow on a future commission. The black box on columns 17 through 21 show that there is no GST in these expense headings.

18. E.& O. Ins. Licences. Enter here if you pay these expenses directly where they are not paid by your broker and billed to you. It covers professional liability insurance, errors and omissions, provincial or other licences. Do not include life insurance premiums or disability premiums or the latter will be taxable if you claim under the policy. They remain tax-free if you do not deduct the premium. [ No GST]

19. Health Premiums. Any taxpayer for whom gross commissions make up 90% of working revenue - - that does not usually include part-time agents with full-time jobs - - can deduct the full cost of individual or family private health premiums such as Blue Cross and including any travel health insurance during the year. This can provide up to 46.4% tax savings to the highest earners. The medical schedule disqualifies an amount equal to 3% of Net Income in their personal tax return then gives tax savings at only 21% on the balance. This 1998 change was a huge tax-saver for high earners and CRA auditors are often not aware of this rule even though it has been in place for 10 years. Send the auditor to our web-site and refer them to S. 118.2 (2) (q) of the Income Tax Act if they threaten to disallow it. It is deductible as a current expenditure in your Business Statement.

20. Referral Fees. These are fees paid to persons not registered as agents. The province says you ought not pay them but the Income Tax Act is federal and they are seen as deductible by the CRA if they are both “documented and receipted”. Keep a two-sentence standardized invoice for such payments or get a full and formal receipt on payment clearly showing the purpose of the payment. Our firm moves these fees from Line 20 in the column sheet up to Line 4 under the advertising, promotion heading in tax returns to avoid using the term “Referral Fee” in a tax return. The use of that term might attract CRA attention as they will jump on that type of expense and require strict proof of a connection to business and strict proof of payment.

21. Salaries, Payroll/Casual Labour. Spouses providing administrative support must be put on payroll with deductions for CPP but not for EI. Your cost here is the gross pay made to a spouse or other employee PLUS your matching share of the CPP as an employer AND the matching EI premium if paid to someone other than a spouse. Children working more than 15 hours a week for you should be put on payroll with taxes, CPP and EI withheld. You match CPP equally and pay 1.4 times the employee’s EI premium payable. For your children working less than 15 hours a week, they may paid on a “Casual Labour: basis which means no GST. They should give you a detailed monthly invoice identifying dates and hours worked and the rate of pay. It is recommended that you pay them by check or get a full formal receipt if you pay cash. Payments to family members are scrutinized more closely by the CRA. Dealings must meet the `business efficacy test’. You must pay them on a Fair-Market-Value basis for services rendered and in the same manner that you would deal with a third party. So for casual labour payments with family members or strangers, the rule is a formal receipt if paid by cash and a detailed invoice plus a cancelled check if paid by check. You make payroll remittances by the 15th of the each month for the prior month using your Business Number. You match the CPP and pay 1.4 times EI premiums payable for your children or third parties. No GST is charged on salaries and payroll costs. The test for "employment status" is generally 1) work provided for fixed hours on a regular basis, at 2) a fixed location with 3) equipment such as computers and desks provided by the employer and 4) a high level of supervision and delegation of tasks. If your spouse is not put on payroll you will face an outright disallowance of payments to the spouse.

23. Detailed Vehicle Expenses. This figure carries over from the "Detailed Vehicle Expenses" summary which includes gas & oil, repairs, washes, CAA fees, lease costs and depreciation on owned vehicles. Claim the full amount of vehicle GST as an Input Tax Credit if you drive 90% or more business and the actual proportion of GST if less than 90%. Note that car insurance and license costs do not include GST. They along with the interest on car loans are deductible depending on the business proportion of driving. Canada Revenue Agency auditors routinely ask self-employed taxpayers to produce an automobile log-book even though no such term appears in the Income Tax Act. The very few real estate agent clients who use our firm and keep a log-book routinely show slightly over 90% and up to about 95% business usage from their log entries. Our firm will go up to 95%, and occasionally higher, for high-earning agents.

The Federal Tax Court ruled in the Qureshi case that: “Neither was it necessary to keep any kind of mileage log or any records to show how much the appellant’s automobiles were used. In fact, this Court would distort the real object of section 230 of the Act by imposing such a burden on the appellant.” ( Our Emphasis) This was a 1990 decision of the Tax Court of Canada which viewed the record-keeping section, s. 230 (1), as demonstrating the view that where there is substantial business usage of one or more vehicles, that it would be unreasonable to expect the taxpayer to log their business driving. The decision still stands and we believe that it supports the proposition that where taxpayers use their car very frequently in the course of earning income that it would be unreasonable to require them to make a log-book entry each and every time they used their car. Some of our higher-earning agents use their car 20 to 25 times in a busy day. The taxpayer in the Qureshi case gave oral evidence in court as to his driving habits and with that evidence alone, the Justice substantially increased the business proportion allowed by the CRA on audit and internal appeal and made the comment about the “burden” such an interpretation would lead to on the part of the taxpayer. The Justice continued on how unfair such a requirement would be and that it was unreasonable. Our firm routinely claims 90%-95% business usage of the vehicle if the real estate agent has two or more vehicles, doesn’t golf or ski, does not have access to a cottage and explains to us that they work long hours seven days a week. On audit, we cite the Qureshi case while explaining to the client that we will allow the CRA to reduce the business proportion to 90% but no lower. An example of “deduct and don’t blink if challenged”. Some of our clients deduct 90% to 95% on one car and 50% or more on a second luxury vehicle used when soliciting a listing from owners of the most expensive homes. The proportion of business usage is based on distance driven. If the Mercedes used for special appointments is driven only 3,000 km. a year and 2,400 km. relates to business, claim 80% business usage. It would be a good idea to log the business driving of that luxury vehicle. If the agent uses the less expensive car to drive a further 25,000 km. in the year, the “90% to 95% business driving rule” with no log-book would be invoked by us on that vehicle. Keep in mind that it is common on an audit to have to explain basic real estate trade and industry practices to CRA auditors. Most auditors do not know the difference between an `agent’ open house versus a ‘public’ open house, that groceries need to be purchased for open houses and what “dressing and staging fees’” for the more expensive homes involve.

24. Capital Purchases. Also known as capital expenditures. Subject to the 90% threshold rule, claim the GST on up to $30,000 of car value in the period acquired. If starting self-employment, claim the GST on the Fair-Market-Value (FMV) of the car at commencement of self-employed activity. Use the Undepreciated Capital Cost (UCC) as an acquisition figure if moving from employee usage to self-employed activity. For items costing less than $500 including taxes, we enter them as fully deductible under the “Office Supplies” heading. This threshold we use has always been accepted by CRA auditors. If starting self-employment, use the FMV of computers, software and office equipment such as printers, faxes, telephones, furniture and decorations used in the area of the home used exclusively for business. Once starting self-employment enter the exact cost on the invoice and the exact GST paid as shown in the invoice. So, use actual invoices to get the exact GST to be claimed as an Input-Tax-Credit in your GST filing and enter the remaining cost including all PST as an addition to class for depreciation purposes. In other, words, do not use the “Simplified Method” for capital purchases.

25. GST on Office-in-Home. This is another area where CRA auditors demonstrate that they are not sufficiently well trained to understand the common trade and industry practices in the real estate industry. It has been our experience that CRA auditors will seek to contrive a reason to disallow the home/office expense without understanding what the correct law is for deductibility of this expense. Too often we have seen auditors, without ever speaking to the agent or the agent’s broker, disallow this expense by citing “space for office usage is provided by the broker” or “taxpayer fails to meet clients at their home on a regular basis”. The first reason involves disallowing the expense without seeking evidence to support it and is unprofessional. The second reason relating “…fails to meet clients…” demonstrates incompetence since 1) they are not familiar with the practice in real estate sales; 2) they have failed to obtain evidence to support the position AND 3) that they are ignorant of the correct law. The requirement to meet clients at your home on a regular basis applies to those taxpayers who pay commercial rent to a landlord AND who, additionally want to claim the home-office deduction - - what we call the “lawyer-doctor approach”. This is set out in s. 18 (12) (a) (ii) of the Income Tax Act. For self-employed real estate agents, even if they pay their broker for inside segregated space, they have an automatic right to claim a home-office expense if the home is used as their “primary place of business”. That is the correct law and is set out in s. 18 (12) (a) (i) of the ITA. The movement to a home-based industry is directly related to the change by TREB around the year 2000 which required all registered agents to subscribe and pay for the MLS service. That service was previously only provided to the broker and explained the line-ups at computer terminals at the broker’s office. CRA auditors are unaware of the change made by TREB as regards the MLS service being charged to EVERY agent and that all agents have set up this service from their home computer. Agents can deduct a home-office using a room-by-room basis OR square footage basis for areas in the home used exclusively for business. [ Do not have a guest bed in the room you might claim for this deduction.]

Since agents are hooked up to MLS at home and use it through-out the day, book appointments from home, keep their business records, computers, equipment and furniture at home, do administration, correspondence and bookkeeping at home including doing their banking from home, it is clear that the home is the “primary place of business”. The real estate industry essentially became home-based once TREB required each agent to subscribe for the MLS service in about 2000. Our firm has never lost the home-office deduction in 20 years of handling CRA audits.

You can claim the business proportion of GST paid on home utilities, repairs, landscape and yard maintenance and condo fee charges. You can claim a home/office expense and even rent out part of your home so long as such “incidental business usage’ of the home does not exceed 49% of the floor-space. The general rule is that so long as a home is used “primarily” for personal purposes - -read 51% of the floor-space - - the gain on sale of the home is completely exempt under the Principal Residence Exemption (PRE). A caution. The PRE is lost on any proportion of the home on which brick or frame depreciation is claimed against gross rents or in a home/office calculation in a self-employed statement. The rule is thus NEVER claim brick or frame depreciation on any portion of your home used as an office or rented out to a tenant.

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