I.

Self-Employment
TAXPERTS CORP. CHARGES $500 PLUS GST FOR A T1 RETURN INCLUDING
T4A, T3, T5 AND OTHER INCOME SLIPS AND A SELF-EMPLOYED
STATEMENT INCLUDING DETAILED AUTO AND HOME-OFFICE EXPENSES.
MOST OF OUR CLIENTS USE OUR FREE SLEF-EMPLOYED SPREADSHEET TO
TOTAL THEIR EXPENSES. THERE IS AN EXTRA CHARGE OF $50 PLUS GST
FOR THE PREPRATION OF A GST RETURN. THE TOTAL FEE INCLUDES ½
HOUR OF INTERVIEW AND TAX PLANNING TIME. WE ARE ACCEPTING
NEW CLIENTS. THE FEE IS FULLY DEDUCTIBLE FOR SELF-EMPLOYED TAX
FILERS.
Realty Commission Agents
1. TAX TOPICS
• PERSONAL TAX & GST INSTALLMENTS
• CRA INTEREST & PENALTIES
• GST RULES & GST RETURNS/REMITTANCES
• LAND TRANSFER TAXES
• LUXURY CAPS ON CARS
• CAR PURCHASE vs. LEASE
A caution about two major recent developments. First, during 2008, the local Audit
Departments of the District Taxation Offices (DTOs) of the Canada Revenue Agency in
Toronto Central at 1 Front St. W., North York at 5001 Yonge St., Toronto East at the
Scarborough Town Centre and Toronto West in Mississauga on Hurontario St. covering
virtually the entire GTA region, have set up special Real Estate Audit Divisions to more
aggressively pursue audits of real estate agents. Our firm expects the number of real estate
agents who will be audited by the Canada Revenue Agency to at least double during the 2009
calendar year.
Secondly, the Department of Justice acting for the Canada Revenue Agency are prosecuting
taxpayers in the Provincial Criminal Courts who have received the written demand to file late
returns under section 150 (2) of the Income Tax Act (ITA) and who fail to file. This is overly
militant and will clog up the criminal courts. Penalties under s. 238 (1) of the ITA for non-filing
of returns is a fine of from $1,000 to $25,000 and up to 12 months in jail. DO NOT FILE LATE.
You are 3 or 4 times more likely to be audited and now face this heavy-handed action by the
CRA. [ See the Discussion on “Penalties” below under “Audits & Appeals”.]
A. PERSONAL TAXE & GST INSTALLMENTS.
PERSONAL TAXES. All taxpayers in Canada file their own personal tax returns. There is no
such thing as a “joint return” as in the U.S. Tax installments are commonly paid by self-
employed taxpayers and those with high pension and investment income which is often the
case with high earners and senior tax filers who no tax withheld at source on interest and other
investment income. Installment payments for self-employed taxpayers include Federal and
Ontario taxes AND CPP self-employment premiums for which the maximum amount will be
slightly over $4,098 in the 2008 tax filing. Installments are required if the total figure of these
amounts exceeded $3,000 in 2007 for the 2008 tax year.
If the balance payable was less than $3,000 in 2007, you are clearly a low earner, and no
installments are required for the 2008 tax year. Payments are due on March 15th, June 15th,
September 15th and December 15th. The Canada Revenue Agency (CRA) will automatically
send notices of 2008 installment requirements based on one-quarter of the balance payable 2
tax years back - - the 2006 tax year - - for the first 2 payments and one quarter of the balance
payable in the prior tax year - - the 2007 tax year - - for the last 2 installment payments. This is
advantageous for those who had lower balances payable in 2006 than 2007. You can also
remit 4 equal amounts based on the “prior year” basis, your 2007 balance payable which is
advantageous for those who paid less taxes and CPP in 2007 than 2006. The third option is to
make installment payments based on the “current year”. This is advantageous for those with
lower taxable income in 2008 than both of 2006 and 2007 but requires intelligent guesswork on
the part of the taxpayer. The object is to remit the least amount while avoiding installment
interest charges. Many Real estate agents with substantially lower gross commissions in 2008
will remit nothing on the December 15th if they have made the first 3 payments requested by
the CRA if the total of those three payments will be equal to or greater than the actual balance
you expect to pay in your 2008 T1 personal tax return. Interest is charged on installment
shortages from the due dates. You may adjust installments down to reflect decreased
revenues but risk interest charges if you under-remit. [ See our tax charts with escalating
Federal/Ontario rates as taxable income rises. ]
TAX TIP: Many agents saw a dramatic drop in commissions from the 2007 to 2008 tax years.
The CRA calculation of tax installments which they mail to you are based on 2 years back for
the March 15th and June 15th payments and 1 year back for the September 15th and
December 15th payments. For 2008 that means the 2006 and 2007 tax filings respectively.
GST installments are always four equal payments based on GST owed - - Line 109 of the GST
return - - in the prior year. By the first of December each year, agents know what their total
commissions will be for the year ending December 31st. Where gross commissions have
dropped drastically from 2007 to 2008 by as much as $50,000 or more, you are likely safe to
conclude that the total of your first 3 tax and GST installments might be equal or greater than
what you owe as calculated in your 2008 tax and GST returns. The answer is to send no
installment payment for taxes on December 15th or for the fourth GST installment due by
January 30th, 2009. This will avoid making excess installments which amount to a tax-free
loan of the extra money to the CRA which you will not get refunded until 5-6 weeks after you
file your returns. Those with large refunds coming should have their tax and GST returns
prepared and filed in the first week of March 2009 to speed up receiving any large tax and
GST refunds they may be entitled to.
In the same vein, the first tax installment for the 2009 tax year due March 15, 2009 is based on
one quarter of the total of your Federal and Ontario taxes plus your self-employed CPP
premiums for the 2007 tax year. That figure could be substantially higher than that for the 2008
tax year. If your balance payable is substantially less for 2008 than it was for the 2007 tax
year, you can base your March 15, 2009 installment payment on your 2008 balance which
could be substantially less than the figure provided to you by the CRA. Remember that the
rationale for installment payments is to pay the LEAST amount possible while avoiding interest
charges for under-remittances. Paying more that you are legally required to amounts to an
interest-free loan to the CRA. Any over-remittances on the March 15, 2009 payment can be
adjusted for by paying a lesser amount for the June 15, 2009 personal tax installment when
you have your final numbers for the 2008 tax and GST returns.
GST. Those with gross self-employed earnings over $500,000 in a year must file GST returns
on a quarterly basis declaring GST collected for the quarter LESS GST paid - - “In-Put Tax
Credits”. For 2009, the threshold is rising to $1,500,000. Those with less than that amount can
elect to revert to annual filings for 2009 and pay installments but the election must be filed
within the first 90 days of 2009. The election for a new “filing period” is Form GST20 E and can
be downloaded at www.cra.gc.ca and mailed to the Sudbury address used for regular GST
returns.
Only annual filers make GST installment payments. For 2008, installments were required if the
GST remitted in 2007 exceeded $1,500. This threshold is rising to $3,000 in 2008 for GST
installments payable in 2009. If you exceed the threshold, divide the actual amount you owed -
- Line 109 of the GST return entitled “Net Tax” - - by 4 and equal remittances are payable on
April 30th, July 30th. October 30th and January 30th of 2009 for 2008 GST installments. Thus,
pay one-fourth of prior year remittance on each of those dates.
NOTE: If you pay tax and GST installments or a payroll remittance at a financial institution, the
general rule is that you must pay at least one full business day before the required date. The
same rule applies if you are using your Business Number to make a payroll remittance for an
administrative assistant on salary by the 15th day of the end of the month. Pay at the bank 1
full business day before the 15th or you will be assessed the standard penalty for late payroll
remittances of 3% of the amount remitted. Late tax and installment payments are subject to
only interest charges. But, If installment interest levied exceeds $1,000 then you are subject to
an additional penalty assessment on top of the interest. Late payroll remittances are subject to
a 3% penalty. The former “GST Number” ended in 1996 and became a “Business Number”
used for all of corporate and GST filings and payroll remittances. GST filings use the 9
numbers with the extension “RT0001” while payroll remittances use the 9 numbers plus
“RP0001”. Payments for your personal taxes or tax installments include Federal and Ontario
taxes and self-employed CPP premiums which are a maximum of $4,000 for 2008 and you
ALWAYS use your Social Insurance Number for those payments. All checks for payroll, GST
or personal taxes are made out to the “Receiver General of Canada”.
B. 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.

GST & GST REMITTANCES

Filing Periods/Registration.
You must register if your gross earnings exceed $30,000 in your first year. Since the 1996
personal tax year, all self-employed taxpayers have been required to use the calendar year as
their business year. If you do not register for a Business Number (BN) - - called a GST Number
until 1996 - - you will not recover the 100% of the GST included in your expenses. So,
REGISTER and remember that many agents often get refunds in their first year of activity
when expenses exceed commissions. You can file GST on an annual basis if your annual
revenues were less than $500,000 in 2007. The threshold is rising so, if commissions are less
than $1,500,000 in 2008, you can elect from a quarterly to an annual filing period for 2009 but
you must elect to go onto an annual filing within the first 90 days of 2009. Monthly and
quarterly GST filers must file GST returns within 30 days of the period end or face penalties.
This leads to more time spent on bookkeeping and requires you to then `annualize’ your 4
quarters of commissions and expenses to get yearly totals needed to complete your personal
tax filing. It reduces time and cost to “harmonize’ your GST and tax filings so that both are the
calendar year. Those earning over $1,500,000 of commissions in 2008 must remain on a
quarterly filing basis. Annual filers alone make quarterly GST installment payment. The formula
is that if you remitted more than $1,500 of GST in the previous year - - see Line 109 of your
GST return entitled “Net Tax” - - then you must make quarterly GST installments equal to 1/4
of the total GST remitted in that prior year during the subsequent year. As discussed above in
the section on ”Installments”, many agents with much lower commissions in 2008 than 2007
will forgo making any tax installment on December 15th and nothing for GST on January 30,
2009 as their installments for the first three quarters is sufficient to cover 2008 tax and GST
payable.
Remember that:
• GST is removed from both revenues and expenses in your tax returns. You must
account for the 5% of GST collected. Your commissions and your expenses, after
extracting GST, then go in your business statement, the “T2124 Statement of
Business Activities”, in your personal tax return.
• Register for GST. It is better to get every cent back of GST as an Input-Tax Credit - -
equivalent to cash - - by deducting it against GST collected than it is to not register
and leave it in your expense statement in your personal return where it will saves you
0% if your taxable income level is under the personal exemption amount of $9,600 or
at only 21%, 33%, 43.41% or 46.41% depending on what other income you might
have in the year.
• De-register your Business Number if you cease activity Use Form RC 145. Bank,
insurance and government expenses must be entered separately as they do not
include GST. See our free column sheet which automatically extricates GST from
GST-subject expenditures and shows a black box on the globalized sheet for
expenses which do not include GST
• Once you register for a BN number and charge the required 5% on your commissions
- - the vendors are paying the GST and you use that money to repay yourself for the
GST paid in your expenses. Nice! You are a tax collector, the horror!!, and you must
collect GST and file a GST return and you do not get paid to do it.
GST On Sale of New & Renovated Homes & Businesses
A warning. The sale of new or “substantially renovated” homes which have been gutted is
subject to GST so add 5%. It is a `gut’ if “…other than the foundation, external walls, interior
supporting walls, floors, roof and staircases, [have] been removed or replaced...”. Arguably,
retaining 50% of the inner walls is sufficient to avoid GST. A short period of personal usage will
negate the need to charge GST as the resale of residential properties is exempt from GST. So,
live in your home for a month after renovations - - no matter how extensive they were - - are
completed before listing the home for sale and this short period of “bona fide personal usage”
will take the home out of the definition of a new or substantially renovated home and you need
not charge GST. Get advice as you are walking a fine line. Purchasers buying a new or
renovated home for personal usage may get a partial GST rebate if the purchase price is up to
$450,000. The cap on the rebate is $8,750. When dealing with properties with both business
and residential uses, the allocation of value must be done precisely as ONLY the business
component is GST-taxable. GST is paid on the purchase of a business property. You can elect
to exempt the purchase from GST as a “Going Concern” if the purchaser vouches to continue
90% or more of the existing business. Think of stores and restaurants. The election form “GST
44” is filed by the registrant purchaser. It reduces the cash needed to close. An extra 5% is a
lot of cash.
Methods for Filing GST
There are three:
1. QUICK METHOD: You can elect to use this method but it is only useful to computer
`techies’ and others working a home-based business with low expenses such as only cell-
phone, vehicle and home-office expenses. You can opt to use this method if your `blended
revenues’ which is your fees PLUS GST total up to $200,000. Pay 3.6% on first $30,000 less
1% of the `blended’ amount and remit. E.g., for a blended amount of $25,000 you would pay
3.6% of $25,000 LESS 1% or $250. Over $30,000 remit 3.6% of the blended amount, remit
You are then entitled to decrease the total amount by the precise amount of GST in your
invoice that you paid on capital purchases - - cars used at least 90% for business, computers.
Equipment, furniture etc. You claim the GST paid on capital purchases as an Input-Tax-Credit.
[ NOTE: This method is advantageous only for those who have expenses totaling less than
29% of gross income. It is rarely favourable for real estate agents who usually have expenses
well more than 29% of gross commissions. ]
2. SIMPLIFIED METHOD: This is the most common method and used by about 95% of self-
employed GST registrants. This is used by those with gross commission earnings up to
$500,000. In 2008, GST was reduced to 5% on your commissions. Then deduct the GST on
your expenses - - claimed as “in-Put Tax Credits” or “ITCs” - - other than payments to banks,
insurance companies or government. Such expenses as licenses, interest costs, car and
liability insurance are not subject to GST. [ See the black boxes on our free column sheets. ]
You then multiply the expenses upon which you claimed GST by 4.7619% to extract the GST
and claim the exact amount of GST paid on the first $30,000 of a car purchase and on any
computers, software, equipment, furniture or other capital expenditures. Remit the balance if
GST collected exceeds your ITCs or claim a refund if the reverse is true. Those in their first
year selling real estate often get a GST refund.
3. DETAILED METHOD: Is for those with commissions over $500,000 which will be rising to
$1,500,000 for the 2009 tax year. This complicated and lengthy procedure requires you to
break out the base cost from GST and PST paid and enter the specific amount for those 3
items. Claim GST paid as an ITC against GST collected then total cost plus PST to get the
amount of the deduction for each expense heading for your business statement in your
personal tax return. Our firm has noted that CRA personal tax and GST auditors are unfamiliar
with the detailed method. Many of our clients grossing over $500,000 in commissions use our
real estate column sheet set up on the Simplified Method and we have never heard a peep of
protest from a GST - - also known as an Excise Tax Act - - auditor. Don’t tell anyone we told
you about this short-cut approach to making your GST bookkeeping entries. The extra work is
time-consuming and expensive if you are paying for bookkeeping.

D. ONTARIO LAND TRANSFER TAX TORONTO LAND TRANSFER TAX

The LONG FORM for calculating Ontario

The LONG FORM for calculating Toronto LTT is:
LTT is :
5% or $275 on the first $55,000; plus 5% or $275 on the first $55,000; plus
1% from $55,001 to $250,000; plus 1% from $55,001 to $400,000; plus
1.5% from $250,001 to $400,000; plus 2% over $400,000
( The Toronto LTT is $750 less for homes over
2% over $400,000
$400,000)
E. AUTOMOBILE CAPS
For “PASSENGER VEHICLES” bought after 1986 and defined as driver and up to 8
passengers. The caps DO NOT APPLY to vans, pick-up trucks or similar vehicles.
PURCHASE. You can depreciate only $30,000 plus GST and PST since 2001. Reduce the
depreciable amount by any GST claimed as an Input-Tax-Credit. For cars used 90% or more
in business, claim all of the GST on auto expenses as an ITC.
AUTO LOAN. Interest cap of $10 per day.
LEASE. A monthly cap of $800 plus taxes, but reduced if the sticker price exceeds $30,000
plus taxes.
KILOMETER CAR ALLOWANCES. Employees are entitled to a non-taxable car allowance of
up to 24 cents on the first 5,000 kilometres and 21 cents beyond that limit. For deduction
purposes such as a short-form for business statements and amounts claimable in the medical
schedule for driving for medical treatment, you can claim up to 52 cents on the first 5,000
kilometres and 46 cents beyond that limit.
F. CARS - - PURCHASE vs. LEASE
This is the most common question we get from self-employed clients who telephone to our
office. Start with the fact that if you drive a vehicle 90% or more for business that you get 100%
of the GST back on the first $30,000 of a purchase and on the qualifying amount of lease
payments. The formula for calculating the deduction for car lease payments is more generous
as it effectively allows you to deduct in your personal tax business statement the lease
expense on the first $40,255 - - in the 2007 return - - of sticker price which is the cost before
GST and PST. This is subject to the monthly cap of $800 plus taxes but no car leased for 36
months costing only $40,255 will come close to that cap. Clearly, the CRA has designed a
formula which acknowledges that lease payments have an interest charge built in thus the
extra deduction room.
The lesson is that for a car with a cost over about $35,000, always lease. The extra $5,000 is
not enough to agonize over if you prefer purchasing over leasing. Remember though, that if
you buy you will get back only the GST on the cap of $30,000 used for depreciation which is
$1,500. Buying above $30,000 means you get not one penny of depreciation or GST for any
amount above $30,000. To illustrate, a $67,000 new BMW purchase means you lose the GST
on $37,000 and any depreciation on that $37,000 which at the top marginal tax rate of 46.41%
on 90% usage equals $15,455 of tax savings evaporating into thin air without a deduction over
the ownership period. Also note, that if you are going to buy, borrow up to $30,000 to buy since
you will get a full deduction on the interest paid as well as the depreciation on the first $30,000
of cost. Only pay cash if the mortgage on the house is paid off and you have `maxed out’ your
RRSP contribution limit. So, borrow to buy and save your cash to make RRSP contributions - -
a priority for these in either of the top two tax brackets at 43,41% and 46.41% tax rates - - then
use any remaining cash for an annual pay-down on the mortgage principal on your house.
The wisest scenario is to go second-hand luxury, Mercedes, BMW, Lexus, Infiniti etc. where
there are GREAT deals on 2- and 3-year old cars and keep the sticker price down to about
$42,000 for a full deduction on your lease payments. Note the number of “Pre-Owned”
divisions at all the major luxury car dealerships and auction purchases can save you another
$10,000 but arrange ahead of time for a private lessor to give you a lease contract. Two final
points. Firstly, the standard lease contract allows only 24,000 kilometers of annual driving
subject to a little bit of negotiation room up before a penalty charge is levied if you turn the car
in at the end of the lease. If you work the `Highway 7 Corridor’ and are doing 40,000 kms. of
driving each year or more, the mileage penalty will be so high you are likely looking at avoiding
that huge cost by buying out the vehicle at the “buy-back cost”. You have set yourself up to be
squeezed and this is one scenario which might lead to a purchase being preferable to leasing.
Secondly and lastly, DO NOT make large `bubble’ payments on any lease deal. Where the
sticker price is greater than the luxury cap of $30,000, the Income Tax Act (ITA) does not allow
for any deduction on such payments.

The same principle applies if you trade in your old car to reduce the contract price of the car on
a lease. If you get $9,500 of trade-in value, that amount will simply apply against the
Undepreciated Capital Cost of the car going into the year. If your U.C.C. is lower than $9,500,
you will actually recapture depreciation and bring into income the business proportion of the
excess. On a positive note, if you U.C.C. is $12,500 with a trade-in value of $9,500, you will
incur a “terminal loss” of $3,000 and, at 90% to 95% business usage, get a high tax savings on
the $3,000 differential. So sell the car if leasing for more than $30,000 and use the cash for an
RRSP contribution. If a `bubble payment’ is requested, explain that your tax professional
warned you that you get no tax deduction for such payments when the sticker price is over
$30,000. They know this and are desperate to lease the car. Pay $1,000 down at the most and
first and last month’s lease payments and you will get the car. Enough said. Please read again
and don’t call.

2. Revenues & Expenses

Accounting & Tax Principles. Net income is simply gross revenues less qualifying expenses
and the result may be a loss. Business losses, including rental losses, are first deducted
against other income in the year to get Net Income for the year to a zero amount and any
remaining losses - - a negative figure at Line 236 of your personal tax return - - may be carried
back 3 tax years, so long as you file by the June 15th deadline, and forward for 10 years. To
do a loss carry-back on business losses or on net capital losses, which can be applied against
taxable capital gains in any of the 3 prior tax returns, you complete the Form T1A “Loss Carry-
backs”.
Business statements are based on either the accrual method which reports income if invoiced
in the fiscal period - - use closing dates - - and deducts expenses incurred in the same period.
The most common method used is the simpler cash method, available to self-employed
commission earners ONLY, which declares revenue only if received by year-end and deducts
only expenses paid by the year-end. Self-employed agents may receive a T4A slip from their
broker showing self-employed commissions in Box 20 or an “Annualized Statement of
Commissions & Expenses”. If one or both situations apply to you, you must use the numbers
provided by your broker. If the Box 20 amount includes 100% of commissions including the
broker share as it set out in the “Independent Contractor” agreement commonly signed
between brokers and agents, then declare the Box 20 amount as Gross Commissions on the
T2124 “Business Statement” in your personal tax return and enter a deduction under “Other
Deductions” for the contractual broker split of commissions. This situation usually leads to two
entries. First, a figure for the broker split of commissions. Secondly, an entry for “Broker
Administrative Fees” which includes any other expenses paid by the broker on your behalf and
`passed through’ to you in the annualized statement. Use the ‘pass-through’ expense figure on
the statement and keep the statement as your proof of the expense. Remember that the
Income Tax Act requires you to keep your books and records including all receipts and
invoices for expenses for a 6-year period. That means for the 6 tax years prior to the current
year. For 2008, you are required to keep all documents for the tax years 2002 through 2007
which would include documents on rental properties and stock and mutual fund sales for those
years.
Deductible Expenses for Employees. Employee agents, still common in commercial real
estate sales, get T4 slips showing commissions earned with CPP premiums, EI premiums and
Federal and Provincial Tax withheld. Commission employees claim expenses in the
"Employee's Allowable Expenses" Form also known as the T777 Form in their personal tax
return. The expense will include GST which is then, with computer-generated returns,
extricated from the expense and claim as a cash credit in the GST 370 Rebate Form at Line
457 in their annual tax filing. So both employee commission agents and self-employed agents
recover the GST in their expenses. Employees do not collect nor remit GST. A T2200
"Declaration of Conditions of Employment ", signed by the broker, must be retained to be
provided to the Canada Revenue Agency (CRA) if requested. Rules for deductibility of
employee expenses are governed by Section 8 of the Income Tax Act (ITA) and are punitive
when compared with the more liberal deductions allowed for self-employed agents who are
governed by Section 18 (1) of the ITA which allows the deductibility of expenses if “incurred to
produce income”. Self-employed agents have the onus of making the business connection by
relating an expense to the earning of income. Commission employees are disallowed vehicle
usage to and from their broker's office and may claim a home/office expense only if they work
more hours at home than at the broker's place of business and cannot claim loan interest costs
except on the first $30,000 of a car purchase, get no depreciation or any deduction for
computer, equipment and furniture purchases for greater than $500. The latter is the threshold
we use for “Capital Expenditures”. If less than $500 we deduct the amount as a “Current
Expenditure” under “Office Supplies”. Thus employees must lease any computers, equipment
or furniture. So, punitive.
Deductible Expenses for Self-Employed Agents. Self-employed agents are not subject to
Employment Insurance premiums and income tax and CPP are paid on the installment basis
rather than deducted from each commission. 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, may be
added to 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. The home/office
expense must be carried forward once self-employed income is reduced to NIL. Self-employed
agents may treat driving to and from the broker's place of business as deductible business
usage.
Dinners and event costs have been only 50% deductible since February 22, 1994. 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.
Business Numbers. Replaced GST numbers in 1996 and are used for GST and payroll
remittances and in personal and corporate tax returns. You must register for a business
number and charge the 5% GST if gross earnings in the year exceed $30,000. If annual
revenues are under $30,000, you must still complete the BN application and claim exempt
status from charging and remitting GST on that basis.
Quarterly Tax Installments.These are paid on March 15, June 15, September 15, and
December 15th of each year and may be based on the LEAST of: 1) prior year; 2) current
year; or, 3) 2 years back for first 2 payments and 1 year back for the last two. Pick the method
that minimizes the payments while avoiding interest charges. Theoretically, you are paying ¼
of your annual personal taxes and self-employed CPP owed in each payment and you will pay
more taxes or get a refund depending on the figures in your tax return.
Operating Or Current Expenditures. We have enclosed a separate column sheet to track
your revenues and all broker fees as well as an expense sheet. For both revenues and
expenses govern yourself by the principles of accuracy and thoroughness. These expenditures
are fully deductible subject to specific limitations such as only 50% deductibility for business
dinners, events, gift certificates for those first two expenses, travel meals when more than 12
hours away from your “regular place of business” and for groceries purchased for open
houses.
TAX TIP: Most accounting firms make 90% or more of their revenues from corporate
clients and place little importance on preparation fees for personal tax returns. CAs and
CGAs also tend to be conservative in preparing personal tax returns yet frequently
charge $600 to $750 or more for self-employed tax returns. This conservatism leads
them to adopt practices which prejudice their clients such as claiming only 75%
business usage on a car and not claiming a home-office expense as they mistakenly
believe it jeopardizes getting a full exemption on the sale of your home when claiming
the Principal Residence Exemption on sale. [ See the discussion on the Home/Office
expense below.] Taxperts has both lawyers and accountants on staff who specialize in
tax filings for small corporations, personal tax returns for self-employed taxpayers and
real estate investors and on audits and appeals. We specialize in real estate and believe
that we do the best and most economical tax returns in the city. The President is a
lawyer who is RECO-approved for a 3-hour live and 2-hour internet CEU credit
presentation on “Taxation & Residential Real Estate” and all staff have extensive
knowledge of the real estate industry. We charge only a base $550 for a self-employed
personal tax return including the GST filing which includes one-half hour of interview
time to review general tax issues and tax planning. We also routinely claim 90-95%
business usage for the auto expense which accurately reflects usage in real estate
sales and we always claim a home-office deduction for every one of the 550 to 600 real
estate agents who use our firm. Agents became home-based once TREB required them
to subscribe for the full MLS service which agents now access from their home. This
was THE major change in real estate sales in the last 10 years and something which
CRA auditors do not understand. We claim deductions accurately and legally but
deduct every qualifying penny. We feel our expertise saves the average agent at least
$2,500 to $3,000 in taxes compared to returns prepared by accounting firms. If we have
offended any accountants reading this site, take a hint, get upgraded training in
preparing personal tax returns since the tax rules for personal returns are many times
more complicated than the rules which relate to preparing a financial statement and T2
Corporate tax returns. Most personal tax preparers are unaware of many of the points
we make below in our discussion of expenses qualifying for deductibility for self-
employed realty agents. A final point. Only lawyers and accountants trained under
lawyers are sufficiently knowledgeable to represent self-employed tax filers when
audited on their real estate expenses. The 1 Front Street, 5001 Yonge Street,
Scarborough and Mississauga Canada Revenue Agency (CRA) District Taxation Offices
all set up “Real Estate Audit Teams” during 2008 to go on a full-out audit attack on real
estate agents. A bad audit can result in up to 30% or more of your expenses being
disallowed as a result of the militant and uninformed approach adopted by CRA
auditors. Our firm succeeds in preserving 95% to 100% of expenses claimed in tax
filings IF the agents keep good books and records as discussed on our web-site.
Lawyers draft tax legislation, understand the rules in the Income Tax Act when
preparing returns and represent taxpayers when a tax appeal reaches the Federal Tax
Court of Canada. So, get the point. If audited, get someone with legal experience to act
as your agent on an audit. Fees incurred on tax audits and appeals are fully deductible.
Our firm guarantees excellent results.
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 2006 and 2007 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 returns, Input-Tax-Credits (ITCs) claimed in a GST filing will be
disqualified if there is no GST number on the invoice for services and GST was paid. This will
happen even if the expense is clearly business-related. You will be punished since the
business does not set up its invoice correctly. The CRA will adopt a strict application of the law
but this is typical of the punitive and unfair positions taken by CRA auditors. Expenses for real
estate agents on their spreadsheet are discussed below by reference to the number for
the specific heading on the sheet:
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 as discurssed below.
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 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
99% of 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
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
your 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. We cannot adopt this strategy if you are running your commissions and
expenses through a joint bank account set up with your spouse which includes
personal expenses. 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 The
Printing House 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 of a
personal 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 diners through the Business Statement. This
challenge can be rebutted by providing the credit card statements for the card used for
personal usage and showing those types of 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
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 are at work 24/7. Be aggressive.
Residential tenants who pay a segregated parking cost should pull that amount form 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 apartments is used for business
under the home-office calculation. Downtown apartment parking can be $100 to $125 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 earning income”.
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: “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. 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. 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 (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 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.

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4. Audits and Appeals

You can appeal any reassessment by the CRA internally to an Appeals Division at a CRA
District Taxation Office using 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 expense. 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 and got them off their rear
end and in preparing and filing returns. As noted earlier, 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 going and get the 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 print out our detailed discussion of the expense
headings relating to our spreadsheet and insist that the auditor read it 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.
• “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 about 20-30% 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 the latter 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. 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
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 form 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
penalties are in addition to the 50% civil penalties levied by the CRA. Even worse
is s. 239 (1) of the ITA which will also 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
have 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 penalties they establish that there is gross negligence or fraud and must show
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 the
inapplicability of penalties. 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)). The Supreme Court of Canada said in a famous case that: “It is the right
of every taxpayer to aggressively attempt to minimize their taxes.”.
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
egregious misconduct on the part of the taxpayer.
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. 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.
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