How to deduct start up expense (coaching & membership) before purchasing a property

I recently joined the 5am club.

You know how people say that all successful people start their day early – that is NOT the reason for me.

I did it simply because – by looking at my daily routine with two kids, I feel that starting my day early makes a lot of sense.

I get to spend the breakfast time with them guilt-free, go to the gym with Erwin guilt-free & still be productive at work.

And I am tired anyway if I don’t go to bed immediately after I tuck my little Robin in around 8:30pm.

Truth to be told, I have only started working at 5am for one morning for the last few weeks. I am still adjusting to the new schedule.

Some days are better than the others though.

It isn’t easy.

Alongside with my 5am wake up, I also like to meditate daily, exercise 3x a week, plan daily, limit the number of times I check my email and use a drill that forces me to focus at the task on hand for 45 minutes.

I gotta tell you that some of these habits are so difficult to implement. But tracking can help.

After listening to one of Tim Ferris’s podcasts, I picked up a tip on using the calendar to help me build my new routines.

I print off a few calendars for the month of September. On each of them, I write down the habit I want to implement and use the empty calendar as the tracker.

For the day that I did get up early, I would get a check mark that day.

It gives me a great sense of achievement and provides really good reminder to myself that I have to do these new habits every single day!

And I did it most of the time.

Nobody’s perfect. You can see my September month that I wasn’t able to get up at 5am every single day. 🙁

I did it in more days than not! Progress is what it counts. Hopefully by the end of this month, I will be making some progress over October. 🙂

Now, onto this week’s topic.

Many investors had asked me when they would be able to start deducting expenses against their rental portfolio.

Many of them actually incurred a large amount of expenses upfront before they even own any properties.

Sometimes it can be as long as a year or two before they actually purchase their first property.

And they wonder if their expenses that they incurred on coaching and seminars from 2 years ago would be deductible.

Truth to be told, this is a grey area.

Whether a taxpayer is able to deduct expenses incurred prior to purchase of their property, it really comes back to when was the day the business started.

CRA considers that a business has begun whenever some significant activity is carried out.

Significant activity is either the regular activities that you would carry out to generate income OR an essential preliminary to normal operations.

To apply this criteria from a real estate investor perspective, significant activity can be the moment you sign a Buyer Agency Agreement with your Realtor to look for an investment property (this is an activity that you need to carry out to generate income).

Another example of significant activity can also be the moment that you submit your application for mortgage approval. You need to qualify for financing before you can purchase any properties. And mortgage pre-approval is the essential preliminary to normal operations.

If a taxpayer simply joins a real estate investment club to see if real estate investing is suitable for them, the costs of memberships to join the club would not be deductible.

On the flip side, if a taxpayer joins the real estate investment club and is actively looking for a property so that he can apply the knowledge that he has learnt (be it actively or through articles like the ones at https://cristalcellar.com), he’s likely able to deduct the membership given that he’s actively looking for a property.

When a taxpayer attends a $200 weekend workshop to “check it out”, in which he also signs up for the $20,000 coach program that provides the step by step guide to invest, this can also be viewed as a significant activity to the start of your business. This can be viewed as the essential preliminary required to carry out the business.

Together with taking actions (actively looking for properties), this $20,000 coaching program can be a deductible expense. (But the $200 still isn’t deductible since the taxpayer is just looking around).

The more evidence you can show that the significant activity related to the commencement of your business has happened, the earlier you can deduct the expenses.

And of course, it matters whether you actually purchase a property or not!

If you purchase the property, it’s just so much easier to establish that your intention was always to have a business. 🙂

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant