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. 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 invoices, trade record sheets and bank records. Expenses should be documented as to their nature and there should be proof of payment. In real estate, most brokers issue a T4A slip with a Box 20 amount for gross commissions and/or an annualized “Statement of Commissions & Expenses”.  The latter 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. That development resulted from an Ontario Court of Appeal ( OCA. ) decision wherein Justices of the OCA concluded that real estate agents ought never to have been on employee status since there were virtually none of the indicia of an employer-employee relationship.  The Court said the real estate agents 1) did not work fixed hours, 2) did not work at a fixed location, 3) operated with little or no supervision from the broker, and 4) bought their own equipment such as cars and computers whereas these items were routinely provided by an employer in employment situations. A close look at these points made in the decision explains why many if not most agents working in the area of commercial real estate, when they might be in the broker’s office 6 hours or more each day, are still on payroll status. They are governed by the more punitive rules for deduction under S. 8 of the Income Tax Act.
Points for keeping good records and protecting yourself if audited:

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 T4S slip in Box 20 or if the summary of commissions earned in the year shows the full 100% of commissions before breaking on the contractual portion of commissions due to the broker. Always deduct any ‘pass-through’ expenses billed to you by the broker in the manner discussed earlier. The broker may incur expenses on behalf of an agent such as a major newspaper advertising then `pass through’ the agent’s share of that expense. This will be the case for every expense paid by the broker on the agent’s behalf and will show on the industry standard annualized “:Statement of Commission and Expenses” prepared by virtually every broker. Keep the 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 GST since the broker statement will include a mixture of expenses some of which are subject to GST and expenses not subject to GST. Examples of the latter include E.& O Insurance, Provincial Licence Fees and 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 and do not break any expense out to the other headings. Note that this method is much simpler than breaking an expense to one of the specific headings below which will confuse your preparer and any CRA auditor. The broker keeps the receipt for these ‘pass-through’ expenses so their statement then serves as your receipt. Easy!     

3. Accounting & Legal Fees. All professional fees including bookkeeping, tax preparation fees and legal fees where a lawyer’s opinion 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 if you are so unlucky to end up there 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. This a very general type of expense and give yourself wide latitude in entering an expenditure under this heading. 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. [ See the discussion on “Referral Fees” below. ] You should put names on all gift, dinner and event expenses to make the `business connection’ and do it when you incur your 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. Our firm recommends, in the name of thoroughness, that you also note an address such as  that of the property sold, property bought or even a property on which a failed offer was made. Every extra detail helps.

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 coursed 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 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 $12,000 to $15,000 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 which might not fit elsewhere. Use this heading for computer, software, furniture and equipment expenditures under $500. You get full deductibility under this heading whereas a capital expenditure over $500 will result in a deduction  of only 50% of the normal rate in the year of purchase, known as 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 an example of the “declining balance basis” 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 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 on such fines and 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, Pager, 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 - - 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 less than 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 it would amount to an “onerous burden” to view the record-keeping section,  s. 230 (1), of the Income Tax Act as requiring taxpayers who use their car very frequently in the course of earning income 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 “onerous 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. There is a famous Supreme Court of Canada decision which states: “It is the right of every taxpayer to aggressively attempt to minimize their taxes.” With this principle in mind, our firm routinely claims 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 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 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 a home-office deduction - - what we call the “lawyer-doctor approach”. This is set out in s. 18 (1) (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 (1) (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 form home, keep their business records, computers, equipment and furniture in their office area, 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”.  In this day, brokers only want the agents in the office if they are dropping off a signed offer or, hopefully, if the agent attends a scheduled office meeting. Explain all of this to a CRA auditor. In over 20 years, our firm has never lost the home-office deduction on a CRA audit. It amounts to a common sense deduction. 

On the “Simplified Method” you are entitled to 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.