If you are a real estate agent in Canada looking for the answer to a simple question that all company owners want to know, you are in the right place; in this article, we will be discussing unique ways how to save business taxes for real estate agents. Real estate agents can save corporate taxes, and if you fall in the top-earning bracket in Canada, you are paying almost 46.4%of your earnings towards corporate tax but imagine how nice it would be if you could reduce this amount to 16.5% business tax?
Small business corporations are required to pay 16.5% corporate tax in Canada. According to the Real Estate Council of Ontario (RECO), it is not permissible for real estate agents to become incorporations, according to small business accountants in Toronto. So, how can they save business taxes? There are many ways in which real estate agents could exempt themselves from paying such high amounts of business tax which will be discussed herein.
Create a new corporation
Firstly, if you want to exempt yourself from paying high amounts of taxes, you must create a new corporation; you must further ensure that this corporation is titled in the name of your spouse rather than yourself; this new corporation will be responsible for managing services on behalf of the real estate agent, the roles will include tasks such as marketing, accounting, and administration.
The new corporation will be liable to pay a fee to you for performing its managerial services.
Decide how much expense to charge
The next business tax-saving strategy is to determine the expenses you want to charge.
If you want to know how to save business tax? You must first identify the expenses that the company in the managerial role is going to pay for, and then you will charge them back for these expenses. These are common expenses that any other real estate agent would also pay for, so you would include these common expenses in the managerial company’s costs as a real estate agent. Ordinarily, these include the following expenses:
- Promotional activities
- Hiring of staff
- Utilities such as internet
- Phone bill
- Maintenance and repair of office equipment.
Your spouse needs to charge you back for the expenses mentioned above. These expenses should be charged at the cost plus a mark-up of 15-20%. They must also prepare an invoice detailing all the expenses if you wish to successfully claim corporate tax returns.
Labor hour charges
Another strategy to help you save business taxes, charge for labor hours. Your spouse’s corporation can send you a bill for the time spent undertaking a real estate agent’s task. The tasks can include marketing, administration, etc., or anything that your spouse does.
Monthly cheques to the Management Company are a must
As a real estate agent, you must write cheques monthly to your management corporation, i.e., your spouse’s company; this is to pay them for the services they have undertaken as a management team.
So if you are paying your spouse’s company a sum of $1000, you, in the capacity of a real estate agent, would receive the tax rate of 46.4%, a huge reduction on business tax; your spouse’s company, on the other hand, will only be eligible to pay a tax rate of 16.5%. We hope that answers your question, “how to save business tax?”.
Make sure you have an agreement
Like any company, when you work with a management company, even though it is your spouse’s, you must have an agreement with them; this agreement must be real and drafted by a professional lawyer, it must meet all the legal requirements, and in addition, it must be reviewed by a chartered accountant registered in Canada. Furthermore, this agreement must comply with the laws and guidelines stated by the Canada Revenue agency. So if an audit occurs in the future, all the legal requirements are in place; you must not attempt to create an agreement with a management company without expertise knowledge as this can cause detrimental problems. This can even lead to trouble with the law.
Save on home office expenses
Another way you can save on corporate tax is by claiming a tax return on your home office; it is common for estate agents to have offices that they run from home and may title themselves as self-employed in this case, they can get business tax returns and taxes are deductible. Even though the home office is strict with these deductions, considering the current Covid situation and its impact on companies, the law may be revised.
However, in the case of an audit, there will be no leniency on not having available basic documents such as an audit. If you wish to claim a corporate tax return, you must have an audit that clearly mentions the proportion of expenses that are related to your home office and just that part of your home and not the whole house; for example, if you are claiming a deduction on rent, you must only claim for the square ft on which your office is based in your house and not for the whole house. This would deduct a portion of your property tax bill and other utility and maintenance costs.