Success in real estate can lead to income tax problems with CRA, unless you take care to set aside money each month to pay your income taxes next Spring.
I have often provided debt relief services for real estate agents who ran afoul of CRA. Problems can arise because they don’t have a tax planning program. It typically happens when the realtor begins to enjoy considerable success, attaining annual gross commissions of $100,000 or more.
The reason is ofte these particular agents collect their gross commissions and elect to figure out their tax burden at the end of the year. Whereas salaried workers’ employers withhold income taxes, CPP, EI etc. from each paycheck, these agents receive all of their earnings without any such deductions. If this is the case, it takes planning and discipline to set aside money for the taxman as you earn the big bucks.
Some real estate brokers proactively set aside money for taxes, and others will do so upon request, but not all. If you are a real estate agent not setting aside money for income taxes, I recommend you consult your tax accountant and your broker and come up with a plan which will avoid nasty surprises at year end.
Once a realtor is assessed for an amount they cannot pay, this becomes a debt to CRA, much like any other debt. And it can accumulate and get bigger with each passing year. This is often accompanied by “credit-creep”, where the realtor dips into unsecured credit lines and credit cards to finance their lifestyle and business expenses.
At some point, enough is enough! Their first thought is often ” what happens to my license to sell real estate if I enter into a consumer proposal, or even declare personal bankruptcy?” What will RECO say? This is supremely important to a real estate agent as this license enables them to earn a living.
Related Article: Can realtor keep license if s/he declares personal bankruptcy?
I was retained by a Toronto based realtor, a condo owner, who owed CRA more than $100,000 in personal income taxes for the prior three years. He also had around $70,000 in unpaid debts. Although consistently a six figure earner, he had spent everything he made and was now very distressed over the mess. He felt his life was ruined. And he had not made a commission in two months and had nothing in his pipeline.
We filed a consumer proposal which was to repay around $35,000 to his creditors. Some of it was in the form of a lump sum and the remainder was $200 a month for sixty months. This is an extremely low proposal. We expected there would be opposition and indeed there was.
There is an unofficial rule of thumb that a good consumer proposal should propose to repay 35% to 40% of the original debt. (I have arranged proposals for far less and also for far more – it really is case specific)
Related Article: What is a consumer proposal?
Two representatives from CRA came to the creditors’ meeting. They listened carefully to the agent’s rationale for the low proposal amount, and were in fact sympathetic to his plea for a second chance. A settlement was reached at this meeting.
I arranged the lump sum payment by increasing his existing second mortgage, and the monthly payments were to kick in after six months, giving the agent time to get back on his feet and generate some commission income.
This was a truly terrific outcome – the system had worked, and the agent went from despair to hope and elation over the course of two months.
This is a problem for some real estate agents which is often undiscussed. It’s not second nature for a successful real estate agent to admit failure or financial chaos. And there is also the concern that declaring insolvency might compromise their license to sell real estate. It doesn’t have to be that way. if this is you or someone you know, ask me for help.
Related Article: Three ways to take equity out of your home
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Darlene Hinton, Mortgage agent at Assured Mortgage Services
Great article Ross. With any type of self employed income, this can be a huge problem.
I also find that a lot of Real estate agents invest in property as well. It’s good to keep in mind that you want all your affairs in order should that “perfect” investment property came along.
It would be a shame to lose out because of unpaid or unfiled taxes.
Yes Darlene, Ross’s article is not only good, but it’s timely with Income Tax Season just completed.
We see these situations frequently in our line of work, often we resolve them by preparing a Consumer Proposal with Realtor (i.e. if CRA debts not affordable), which allows them the opportunity to move forward without the stigma of bankruptcy.
However, we also try and help them implement a system going forward; e.g., if there net business income (averaging over the last few years & adjusted to normalize earnings) is 30% of Revenue and their average tax rate is 25%, then we recommend they withhold 7.5% of their Revenue in a separate tax account (30% x 25%= 7.5%).
It’s easy to implement- they don’t get bogged down trying to estimate net income monthly, quarterly, etc. Of course, installments are the best, but you still need a formula to ensure you don’t get behind, as instalments are based on the prior year, which can differ widely sometimes in the world of a realtor.