A question that has been asked many times every year in the past few years is: Should I report the rebate given by the real estate agent for buying a house as income? Can a real estate agent claim the rebate as an expense? Sometimes the buyer receives a T4A from the real estate agent, so how do you handle this question? Here is the official CRA answer you want.
This May 22, 2019 response letter below is the official response from CRA to this question. The important paragraphs have been highlighted in bold red font.
We have summarized this letter in 3 key points:
if the property purchased is for self-use, for example, the property purchased is used as the primary residence for yourself and your family, the rebate is not counted as income. Certainly, it does not need to be reported on your tax return.
If the property is purchased to generate income, such as an investment property, an office for a business, or a business that buys and sells properties, there is a high probability that the rebate will be treated as income or as an offset against the cost of the investment property in these cases.
Usually, if the payment is not for personal consumption or capital expenditure but for business income, then the payment is deductible as an expense. If a real estate agent’s rebate to a client meets the above criteria, it is generally deductible as an expense.
Of course, everyone’s situation is also different, and the specific transactions vary widely. This technical explanation is only a basic opinion, not for specific cases. When you encounter specific problems, you should analyze them and deal with them on a case-by-case basis! It is best to consult with accountants, lawyers and other relevant professionals when encountering uncertainties. Especially for those who are investing in real estate, it is better to seek professional advice for advance planning because of the large amount of money involved and the complexity of the situation. Although the CRA’s explanation is not case-specific, we can also understand a basic attitude of the current CRA management practice on the tax treatment of rebates during real estate transactions.
The following is the original text of this technical explanation from CRA for your reference.
Principal Issues: Are cash back incentives that are received by individual home purchasers from a realty business taxable and are the amounts paid by the company deductible?
Position: Question of fact and will depend whether the amounts received by the home purchaser would be considered income from a source.
Reasons: The Act lists the main sources of income, and a number of other miscellaneous sources. These main sources are income from office, employment income, business income, property income and capital gains.The other sources of income are found in subsection 56(1) of the Act. If the income does not fall within one of these sources of income, it is generally not taxable.
XXXXXXXXXX 2019-079663
S.D’Angelo, CPA, CMA
May22, 2019
Dear XXXXXXXXXX:
Re: Cash back amounts receivedby a home purchaser
This is in reply to your correspondence of January 9, 2019, and our (D’Angelo/XXXXXXXXXX) several telephone conversations, regarding the income tax treatment of certain “cash back incentive amounts” that are received by individuals who purchase a home using the services of a real estate brokerage company realtor.
It is our understanding that a real estate brokerage company (the “Brokerage”) will share with the homebuyer (the “Buyer”) part of the commission that it receives from the seller’s agent up to a maximum of $2,000 in “cash back incentive amounts” (the “CashBack”). You have asked whether the Cash Back received by the Buyer would be taxable and whether the Cash Back paid by the Brokerage would be deductible.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner setout in Information Circular IC 70-6R9, Advance Income Tax Rulings andTechnical Interpretations.
Deductible Expenses
A payment will generally be deductible if it is made for the purposes of gaining or producing income from a business, it is not on account of capital, it is not a personal expense, and it is reasonable in the circumstances. Therefore, the cost of the Cash Back paid by the Brokerage to the Buyer may be deductible if the payment meets these criteria.
Receipt by the Buyer
Whether an amount paid to a Buyer in the form of cash would be taxable to the Buyer depends on the facts and circumstances of each particular transaction.
In certain situations, an amount may constitute a non-taxable windfall, gift, or voluntary payment for the person receiving it. The factors used to determine the nature of a particular payment that may be considered a windfall or gift are discussed in paragraphs 1.2 and 1.3 of Income TaxFolio, S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime (“Folio”) available on the Canada Revenue Agency website. In this case, it is unlikely that the Cash Back paid to the Buyer would satisfy the factors listed in the Folio to be considered a gift or windfall because the Cash Back is promoted on the Brokerage website and is paid to the Buyer pursuant to meeting specific requirements.
Where an amount cannot be categorized as a windfall, gift, or other voluntary payment, the amount maybe taxable to the Buyer if it constitutes income from a source for the Buyer pursuant to the Act (for example, income from an office, employment, business or property).
It is a question of fact whether the Cash Back is from a source of income that is business or property. This may be the case where a Buyer is purchasing an investment property or is in the business of buying and selling homes. A Cash Back amount that is received by a Buyer who subsequently uses the property to earn income from business, property or office will likely be included in income or will reduce the capital cost of the property.
However, in our view, where property acquired is used by the Buyer for personal purposes, for example, if the property is the Buyer’s principal residence, generally, the Cash Back amount would not be considered income from a source that is taxable under the Act and would not be included in the Buyer’s income.
The Canada Revenue Agencyis responsible for administering the tax system and applying currentlegislation, whereas the Department of Finance is responsible for developingtax policy and legislation. Therefore, any concerns regarding tax policy shouldbe directed to the Department of Finance.
We trust these commentswill be of assistance to you.
Yours truly,
Pamela Burnley, CPA, CA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate