Tax Questions

Happy Mother’s day to all of you.

It’s a special year this year. I finally got to spend my mother’s day with my mom, the superhero in my life. ?

Mom’s in town for Mothers Day! 🙂

She’s in town to visit for a week, spending some quality time with us and enjoying the beautiful spring weather in Canada.

The last time we’re able to spend mothers day together was 2007.

Mom’s in town for Mothers Day! 🙂

It gets better when I get to spend it with my two children – I already got two little mittens as this year’s mothers’ day gifts! ?

I was on a coaching call earlier this week with over 200 realtors on the call. They asked me some interesting questions that I thought I would share some of the answers.

  1. Can I deduct clothes and dry cleaning?

Every once in a while, real estate investors and realtors would ask me whether they can deduct clothes and dry cleaning expense.

The answer is no.

There was past court case that involved a Quebec female lawyer claiming her suits as an expense and got disallowed by the court. Quebec court requires specific color for the female lawyer by the way.

The Judge in the case cited that the requirement to wear dark color in court does not mean that she cannot wear these dark color clothes elsewhere. Hence deduction is not allowed.

There was also another court case whereby a financial advisor deducted $8,400 he spent on buying custom suits to go with his new office.

The Judge, in this case, disallowed the deduction, on the basis.

  1. Can I deduct sports events season tickets?

The answer again is no, but there is an exception –

The exception is that if you are taking your client to the specific sports event (with the expectation to talk about business and generate additional income), then you can deduct the expense.

But the deduction is limited to 50%, like meals and entertainment expense, to eliminate the personal entertainment portion from the deduction.

  1. Can I deduct all-conference expense?

If you are self-employed as sole proprietor or partnership, you can only deduct up to 2 conferences you attend during the year.

If you are in a corporation, this rule does not apply to you.

  1. How do I do cash flow forecast?

As I shared during the call, I start doing cash flow forecast based on historical information from a prior year.

You take all the expenses you incurred from the same period the prior year, project it to the upcoming year. For expenses that you know you are going to increase, adjust them accordingly.
For example, if you hire a new marketing employee full time and it is a newly created position, the expense would not have been captured in your prior year expenses. I would adjust the payroll accordingly.

If you know you are going to replace the AC unit in your rental property this year; apparently, your cash flow forecast will be different.

Alternatively, if you already spent tens of thousands of dollars last year in renovating and you won’t need to for the upcoming year, you will need to adjust the current year cash flow forecast accordingly.

From there on, I go back to the revenue. For rental property, revenue is relatively easy to predict. If you have a committed lease, rental income stays the same.

For realtors out there, I will start by making the cash flow projection based on prior year income. I will then do scenario analysis, with best case scenario and worst case scenario to project for upcoming year cash flow.

This case, you can get to learn more about your business, be prepared for all the downtown and make a business decision with ease.

  1. Should I hire my assistant as subcontractor or employee?

The most significant difference is the $$$ you will have to pay this person to work for you.

If you hire someone as an employee, you are an employer, so you are required to make CPP and EI contribution. You may also be required to pay severance when you let go of the employee. You are also needed make source deduction remittance on a regular basis to CRA. In exchange, the employee can claim employment insurance (EI) if he gets let go.

On the flip side, hiring someone as a subcontractor may save you a few bucks on CPP & EI. The subcontractor can also deduct expenses that he incurs to earn the income, but he loses the opportunity to claim EI because he’s primarily self-employed.

It is never a decision made by you; preferably it is a question of fact based on the following criteria:

    • Intention: Are both parties intend to work as an employer-employee relationship? Or subcontractor? This can be an agreement signed representing employment or a subcontracting agreement.
    • How much control do you have? Do you control exactly what and how and when the other party works? The more power you have, the more likely it is an employer-employee relationship.
    • Who supplies the tools & equipment? Imagine hiring a plumber to fix your water problem, and chances are, he comes in with his tools. He’s a subcontractor. If you hire an employee, the employer provides the tools to perform the work.
    • Can the worker subcontract work and hire an assistant? If he has the freedom to subcontract out the work, that’s also an indication the worker is a subcontractor.
    • Opportunity for profit? Subcontractor = having your own business. If you are your boss, this means that you can risk losing money. If the worker has no way of losing money, chances are, he is more an employee than a subcontractor

Financial risk? Does the worker require to pay ongoing expenses that would not get reimbursed? Employee expenses are generally reimbursed by the employer whereas subcontractor expenses will not.

Make the decision based on the above criteria when hiring. It can save you some headaches when you get audited.

  1. Should I incorporate and what are the tax advantages?

If you have followed my blog long enough, you would have known that I am a big proponent of using corporate structure mainly for its flexibility and tax deferral opportunity.

If you incorporate, you can deduct more than two convention expenses during the year.

If you incorporate, flexibility can be built in to split income with spouse or adult children. Yes, even with the tax changes imposed by the Liberals during the year.

If you incorporate, you may be able to sell your business (active business not rental portfolio) sheltering a significant amount of capital gain tax.

If you incorporate, you may be able to invest in the corporation structure much faster, even with the tax changes imposed earlier this year!

Of course, like any tax strategies, there are some cases that we don’t recommend incorporation. It all goes back to your specific situation.

Be sure to talk to someone that knows realtor business and real estate investment to discuss your strategy.

Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant

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