Principal Issues: Can a self-employed real estate agent deduct incentives paid to buyers as a business expense?
Position: Generally yes, if paid in an arm's length situation and if all the criteria for deductibility under the Act are otherwise met.
Reasons: Similar to other incentives which qualify as marketing expenses.
XXXXXXXXXX
2010-037673
Andrea Boyle, CGA
September 14, 2010Dear XXXXXXXXXX :
Re: Business Expense for Real Estate Agent
I am writing in reply to your email dated August 3, 2010, in which you asked whether a self-employed real estate agent who used part of the commissions collected from sellers to provide incentives to buyers could deduct the amounts paid as a business expense. The incentives paid were intended to help buyers cover costs such as legal fees, moving expenses and house repairs.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
A payment will generally be deductible if it is made for the purpose of gaining or producing income from a business (paragraph 18(1)(a)), if it is not on account of capital (paragraph 18(1)(b)), if it is not a personal expense (paragraph 18(1)(h)) and if it is reasonable in the circumstances (section 67).
Therefore, the amounts paid by the real estate agent as incentives may be deductible as a general business expense if the payments otherwise meet the above criteria. Depending on the circumstances, an amount would probably not be deductible if it was paid to a non-arm's length purchaser such as a family member. Such an outlay by a real estate agent could be regarded as a personal expense, the deduction of which would be specifically prohibited by paragraph 18(1)(h).
In terms of your question concerning where to deduct the amounts on the real estate agent's return, assuming that the amounts meet the criteria for expense deductibility described above, they would be included in the expenses listed in Part 5 of the T2125 Statement of Business or Professional Activities and could be included on line 9270 "Other expenses".
We trust that these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch