1. This document provides guidance to real estate agents on maximizing vehicle and home office expense deductions and maintaining those claims if audited. It discusses the "knee-bone connected to the thigh-bone" concept of the relationship between the deductions. 2. It addresses common misconceptions about the deductions, such as the notion that driving to the broker's office is personal, or that clients need to regularly meet at the home office. As long as the home is the primary place of business, the full home office deduction can be claimed. 3. Maintaining a computerized logbook using Odotrack software is recommended, as it allows agents to fully document business driving and be "bulletproof" from

1. 1. INTRODUCTION
This bulletin will allow agents to get a high proportion of vehicle expenses - - 85%
up to 95% or higher - - and maximize the home-office expense and maintain
those amounts claimed if challenged by the Canada Revenue Agency (CRA)
AuditDivision.TypicalCRAauditorsseektodisallow30-40%ofexpensesincluding
reducing the business proportion of driving by 20-40% if no auto logbook is
provided. This is a punitive and unfair practice and amounts to a ‘tax grab’. This
can result in an extra $2,000 to $3,000 in taxes plus interest reassessed each
year depending on the amount of auto expenses. Related HST input-Tax-Credit
- - HST spent - - will also be disallowed. At our firm, for full-time agents, we
claim 90% business driving and 95% if the agent has gross commissions over
$100,000. Always be aggressive in claiming expenses.
To understand and maximize the auto expense, you need to understand the
connection between the home-office expense to the auto expense and then
the connection to a new prescribed requirement to maintain an automobile
logbook. So, the knee-bone is connected to the thigh-bone is connected to
the hip-bone etc. There is a computerized logbook product available which will
make you ‘bullet-proof’ from a CRA challenge and will also allow you to track
business dinners and events and gifts and insert names as these are the next
most frequently challenged expenses. With the computerized system, you
will not lose one penny of vehicle expenses and reduce your cost of an agent
representing you on an audit by about 25% or higher.
Both the vehicle and home-office expenses are based on a “usage test”. You can
only deduct the business usage of driving. The home-office is limited to the area of
yourhomeusedexclusivelyforbusiness–thatmeansnoguestbedintheroomyou
use as an office.You can use the room-by-room not counting bathrooms approach
or the square footage basis - - whichever is most favorable. This bulletin is written
in response to the Minister of National Revenue announcing that as of January
1, 2009, self-employed taxpayers and anyone claiming a car expense MUST
keep a hand-written automobile logbook prepared by the CRA. In formalizing this
requirement, the CRA set a trap for itself. The CRA knew agents would not spend
over 100 hours a year on a manual logbook allowing them to adopt a punitive
approach in reducing business driving. The CRA did not foresee that a
computerized logbook system named “Odotrack” (See below) would be
programmed which is fully compliant with CRA requirements and which will
reduce the time to 15-20 hours a year of work and make your auto expense
unchallengeable.
A caution. Starting now, the CRA will begin audits of the 2010 and 2009
T1 personal tax returns - - referred to as the “current year and 1-year back”.
With a 3-year limitation on re-assessing a return from the date of original
assessment, they focus on the 2 most recent years to avoid missing
the 3-year deadline as it typically takes 6 to 9 months to complete an
audit. Around 2008, the Canada Revenue Agency (CRA) set up Real Estate
Audit Teams in all of their District Taxation Offices to audit real estate sales
agents. This was the result of a perception that real estate salespersons
claiming an unreasonably high proportion of vehicle driving and excessive
amounts for business dinners, events and gifts and are notorious for keeping bad
records - - otherwise, easy targets.
2. MISCONCEPTIONS
There are many misconceptions out there attributable primarily to accountants
and purported ‘tax advisors” who do not know the tax rules for self-employed
agents also known as “independent contractors”. Real estate agents came off
employee status onto independent contractor status starting around 1987 and
became ‘home-based’ around 1999 when TREB required that they subscribe for
the MLS service and agents set up MLS in their homes.
I will deal with a few of many misconceptions about both the auto and
home-office deductions:
The FIRST misconception relates to the mistaken notion that driving to-and-from
the broker’s office is personal driving. Employees are governed by S. 8 of the
Income Tax Act (ITA) and employees may NOT deduct driving to and from their
employer’s place of business. Real estate agents have “independent contractor”
status and are governed by S. 18 (1) of the ITA (See below) which allows the
deduction of any self-employed expense “incurred for the purpose of earning or
producing income”. Agents have only a broker/agent licensing arrangement as
BULLETIN
William D. Howse B.A., LL.B. ( Barrister & Solicitor )
R.E.C.O.-ACCREDITED FOR 3-CREDIT LIVE COURSE AND 2-CREDIT WEB-SITE
COURSE ON “TAXATION AND RESIDENTIAL REAL ESTATE” AND 1-CREDIT LIVE COURSE
ON “CANADA REVENUE AGENCY AUDITS”
TO: REAL ESTATE RESIDENTIAL SALES AGENTS
RE: MOTOR VEHICLE & HOME-OFFICE DEDUCTIONS
1. INTRODUCTION
2. MISCONCEPTIONS
3. CASE LAW AND THE INCOME TAX ACT (ITA)
4. HOME-OFFICE DEDUCTION
5. AUTO DEDUCTION “ODOTRACK”
U.S. and Canadian Personal Income Tax Returns,
HST, Corporate Returns,
Voluntary Disclosure Program,
Audits and Appeals,
Federal Tax Court.
2200 Yonge Street, Suite 221, Toronto, Ontario M4S 2C6
Tel.: (416) 493-0444 Fax: (416) 493-5929
www.taxperts.on.ca Email: taxperts@pathcom.com

2. required by RECO and ARE NOT EMPLOYEES. Once TREB required agents
to subscribe for the MLS system and agents set it up at home and access it
there, have their computer(s) and office equipment and furniture at home, book
appointments there, draft “Agreements of Purchase and Sale” at home, keep their
business records at home, book all of their appointments from home, arrange
advertising and promotion at home, do their banking at home, etc. then on a
“usage basis” in terms of tasks performed, the home is their “primary place
of business” as set out under S. 18 (12) (a) (i) of the ITA. GREAT. Such agents
have an absolute right to claim the home-office expense and business driving
commences as soon as they leave their driveway including any trips to and
from the broker. The knee-bone connects to the thigh-bone. This is true even
for agents who have segregated space at their brokers so long as they perform
most of their tasks as an agent at home as discussed. Any accountant who says
otherwise is incompetent.
The SECOND misconception is a variation on the preceding paragraph. It is that
agents need to meet “clients” at their home on a “regular basis” to claim the
home-office expense. For taxpayers who pay commercial rent - - there is no
landlord-tenant relationship between an agent and their broker - - and wish to
claim a home-office expense in addition to the commercial rent, they must meet
the test set out in S. 18 (12) (a) (ii) of using an area of the home exclusively for
business “…on a regular and continuous basis for meeting clients, customers
and patients…”. Our firm calls this the “doctor/lawyer secondary test”. If a CRA
auditor says that you need to meet clients at your home on a regular basis, show
them this bulletin as they are legally incorrect.
The THIRD misconception is that claiming the home-office deduction prevents
a taxpayer from claiming the full Principal Residence Exemption (PRE) on the
sale of their home and some accountants advise their self-employed clients to
not claim this expense out of ignorance of the correct law. So long as the home
is used “primarily” - - read 51% of the finished floor-space - - for personal usage,
you are fully exempt from taxation on any gain on the sale of your home under
the Principal Residence Exemption. You can rent out the basement, let us say
32% of the finished floor-space, and you need to file a T776 “Statement of Real
Estate Rentals” annually in your T1 personal tax return, and you claim a 12½%
home-office expense in your T2125 “Statement of Business Activities”. This adds
up to a total of 44 ½% which is LESS THAN 50% and constitutes “incidental
business usage of the principal residence” and you get the full PRE and fully tax-
free cash on the sale of your home. Simply stick to the basic rule of using at least
51% of your home for personal usage.
The FOURTH misconception is that monthly credit card statements are sufficient
proof of expenses such as gas, repairs, gifts, parking and office supplies which
are fully deductible. This is also true for expenses which are only 50% deductible
such as business dinners and events, foodstuffs and drinks for open houses,
and gift certificates to restaurants or events - - this rule on gift certificates is set
out in the Stapley decision in 2006. All audits are referred to as a process of
“sufficiency of receipts and vouchers” which means you lose expenses if they
are not adequately documented as to the nature of the expense, amount, proof
of payment and NAMES for gifts, gift certificates, business dinners and events
and dates and addresses for expenses on open houses. On audits and appeals,
our firm will get you the gas, car repair and payments to companies clearly
providing services of a strictly business nature under the reasonableness
provision of “Generally Accepted Accounting Principles” (GAAP) if the ONLY
reasonable conclusion is that the expense is of a “commercial nature”. The
lesson. Keep all cash register receipts and credit card receipts and notate
the business purpose and name of any guest for a business dinner/event or
recipient of a gift. The general rule is that the more paper you keep, the better
you will do on an audit. One simple tip is to keep a credit card dedicated solely to
business expenses and a separate one for personal expenses. Do not
“commingle” personal expenses with business expenses in either your business
checking account or with the dedicated business credit card.
The FIFTH misconception is that you can only deduct the costs of one vehicle. If
you have a luxury car used to get listings and an ‘average’ car for the majority of
your driving, you can deduct the business proportion for each if you can justify the
need for 2 cars. If you drive the luxury car only 3,200 kms. in a year but 2800 kms.
are for business driving, then you get 87 ½% deductibility. Take the standard 90%
to 95% on the less expensive car. We advise high-earning clients in this situation
to keep meticulous records on the luxury car. Easy to do since so little driving.
Spouses who provide administrative support to a self-employed agent MUST be
on payroll with taxes and CPP premiums but not EI premiums withheld at source.
You should pay the full costs of their vehicle from your checking account or on a
dedicated credit card in their name. Buy or lease a car in your joint names. You
can pay for gas, repairs, purchase/lease, insurance, business parking license
sticker etc. The spouse should keep a meticulous logbook. You can then deduct
the cost of your spouse’s car - - let us say 65% business driving - - in your T2125
“Business Statement” and you will save at 43.1% or 46.4% if in the highest 2 tax
brackets. Your spouse would save only 21.05% if they claimed the car expense
and are in the first tax bracket below about $41,000 of taxable income. You must
calculate a taxable “stand-by charge” for them based on the personal proportion
of driving and include it in their gross employee income but it will only equal
the 35% of personal driving and they will pay tax at a rate of only 21.05% as
discussed. So, very rarely, an agent gets to deduct the cost of 3 cars.
3. CASE LAW AND THE INCOME TAX
ACT (ITA)
We have mentioned one case and several sections of the Income Tax Act.
The CRA is disregarding the Federal Tax Court (FTC) case of Qureshi v. The
Minister of National Revenue wherein the FTC Justice said: “Neither was it
necessary to keep any kind of mileage log or any records to show how much the
appellant’s automobiles were used. In fact, this Court would distort the real object
of Section 230 of the Act by imposing such a burden on the appellant.” (Our
Emphasis) [NOTE: Section 230 requires that you keep business records for 6
years.] Most auditors do not follow case law, do not know basic provisions of the
ITA and have no familiarity with “trade and industry practices” in the real estate
residential resale profession. They do not know the difference between an agent
open house and a public open house. Better sandwiches with the first. Frequently
they cite the Watt case where the Justice of the FTC said that the taxpayer could
have “easily” kept track of his business driving. The problem with Watt is that
the taxpayer had a sideline consulting business with only 2 clients whom he saw
monthly. Auditors blindly cited this case and ignored our submission that the “fact
situation” - - a legal term - - differed from that of agents where it is NOT easy to
track 3,650 or more business and personal trips in a year.
Auditors are routinely militant, unfair and unreasonable and are rewarded for
the amount of taxes and GST/HST reassessed. CRA appeals officers recognize
this and have scorn for their audit colleagues - - a favorable disconnect within
the CRA. On appeal, we routinely get 85% and even 90% for business
driving and, generally we obtain the restoration of from 60% to 90% of reassessed
disallowance of expenses. The Minister of National Revenues press release on
an auto logbook - - a complete lack of class - - supersedes quibbling over case
law. The CRA will cite the announcement and punish those who do not maintain
a manual or computerized logbook.
Section 18 (1) of the Income TaxAct, as stated, limits deductibility to “…expenses
incurred for the purpose of earning or producing income…”. This is referred to
as the “business connection test”. YOU must connect the expense to business
or it will be disallowed. For many deductions, the name(s) of the guest(s) or
recipient(s) must be provided. Since section 18 (1) of the ITA is general in
nature so CRAauditors will cite general reasons for disallowing expenses such as
“personal in nature” for gifts, dinner and event expenses, “insufficiently
documented” and/or “no proof of payment”. If audited, get competent
representation and leave the audit and potential internal appeal to the CRA
Appeals Division to your “authorized agent”. Focus on earning commissions.
4. HOME-OFFICE DEDUCTION
The knee-bone. CRA Auditors are always wrong on this expense and our firm
has NEVER lost the home-office deduction in 24 years of handling audits and
appeals. We always get it at the Appeals Division and usually even at the audit
stage. Auditors disallow the expense by citing “space for office usage is provided
bythebrokerage”or“taxpayerfailstomeetclientsattheirhomeonaregularbasis”.
The first reason involves disallowing the expense without seeking evidence to
support it and is unprofessional. The second reason relating to “…fails to meet

3. clients…” demonstrates incompetence since 1) they are not familiar with trade
and industry practice and do not know that the TREB requirement for all agents
to pay for the MLS service has converted real estate resales to a home-based
profession; 2) they have failed to obtain evidence to support the position AND
3) that they are ignorant of the correct law which is that if, on a “usage test”
an agent can show that their home is their “primary place of business” as per
S. 18 (12)(a)(i) of the ITA then they need ever have a client in their home and still
get the optimal - - room-by-room versus square footage - - home-office expense.
You can flip up to the “FIRST misconception”.
5. AUTO DEDUCTION “ODOTRACK”
The thigh-bone. The situation is now crystal clear. To get the business proportion
as set out in your “Detailed Vehicle Expense Schedule” you need to keep full
and adequate receipts and vouchers for vehicle expenses and, as the issue has
evolved, you must keep an automobile logbook to preserve a high proportion of
business driving. In a 2010 FTC decision, the Justice said that whenever a real
estate agent claims more than 75% business driving, the onus will be on the
agent to document the business proportion of driving. Bad law but even Justices
of the FTC are not familiar with the driving habits in the real estate profession.
Full-time agents live in their car.
Thegoodnews.Finally,thehip-bone.Maintainingacomputerizedlogbookcinches
getting a higher business proportion of driving. The 2010 announcement of the
new rules for auto logbook set a trap for the CRA. To comply, you must maintain
their “simplified logbook” for 12 consecutive months to determine a “base” year
with a specific business proportion of driving. You must then maintain a logbook
for ANY 3-month consecutive period in a subsequent year and if the business
proportion is within 10% of the “base” figure, you can use that 3-month figure for
the year or the base year, whichever is best. The CRA has designed the manual
“simplified logbook” knowing that 99% of agents won’t use it.
Entrepreneurs in Laval, Quebec created a computerized program which
complies with the new CRA rules. This system called the “Odotrack Automatic
Mileage Logger” is arguably more reliable and accurate than a manual logbook.
Agents could skillfully make manual entries to improperly increase the business
proportion. The “Odotrack” system uses a GPS unit linked to their server. Mount
the GPS unit on the dash, enter the make, model and year of your car and the
odometer reading and you are set.
You hit the button for business or personal driving. If you hit “business” it will
treat all trips as business until you hit the “personal” button. The system will
automatically enter the specific address of departure and arrival and exact
distances driven. It is less subject to abuse than a manual logbook. The
“Comment Section” requires entries but it has memory and will automatically
enter the business purpose of a recognized address. The comments will take
a maximum of 4 to 5 minutes a day. At the end of the year, you hit a button
and it will give the exact business proportion for the year and print out the 100
pages or more of detailed usage if audited including all details in the “Expense
Report”discussedbelow.Youcanthenpickany3-monthconsecutiveperiodinthe
following years which gives you the highest business proportion. Do 12 months
to get your “base” year which might be 88% or higher. Then log February through
April or March through May of the subsequent year and select the highest
percentage of the 2 three-month periods. Based on a “base” of 88% you could
go up to 98% and you do not need to log any driving especially personal driving
in the remaining 8 months.
The system also has an “Expense Report” section which includes amongst others
Business Dinners, Business Events and Gifts. The GPS unit gives all addresses.
You should log these expenses for a full 12 months each year. You should enter
the names of all restaurants, venues and stores along with the names of guests
or recipients. Arguably, this is sufficient to make the “business connection test”.
Typical entries could be for an address of 50 John St., Toronto: “Unit 1505, Agent
Open House”; or for a business dinner “Scaramouche, Dean and Joan Wilson,
Vendors”. All of this is stored on a central server and you are given a password
for your account.
The advantage for tax preparers and lawyers are many:
• the business proportion of driving will be unchallengeable on audit;
• a lot of previously wasted time arguing for the business proportion of
driving is avoided;
• if audited on 2009 or 2010, you can use current Odotrack data as
representative of driving habits;
• the most frequently challenged expenses of business dinners/events
and gifts are documented;
• with much lower reassessments resulting, the CRA will be less likely
to audit real estate agents;
• those with Odotrack could get only a ‘cursory’ audit with few disallowances;
• the CRA will focus on agents who do not use the Odotrack system;
• the professional fees for an audit and appeal will drop by over 25%;
• firms will handle more audits for the more complex and expensive
cases of tax evasion; and,
• these more complex cases are very lucrative and end up in
Tax Court billed at the highest rate.
Within a few years, the majority of full-time residential resale agents will be using
a computerized mileage tracking system as word-of-mouth spreads that they are
very ‘user-friendly’ and the CRA might reduce or even shut down its “Real Estate
Audit Divisions” which now have the majority of auditors in each of the 4 GTA
District Taxation Offices auditing real estate agents. The CRAboasts in the media
and individual cases with our firm that it is going after the real estate residential
resale agents.
You can go to the Odotrack website at odotrack.ca to research the system
or call them at 1-888-217-0039 or 905-355-1240. Our firm will be putting
a strong endorsement on their website and they have already posted our
spring 2011 newsletter which promotes their product and is on our website at
www.taxperts.on.ca. Your business proportion of driving will be ‘bullet-proof’
from a CRA attack. The CRA will not be able to knock a penny off your vehicle
deduction. A kick in the stomach to the CRA. Good on them.
A final point. There is a famous Supreme Court of Canada decision in which
the Justices state: “It is the right of every taxpayer to aggressively attempt to
minimize taxes”. They pay taxes too and probably don’t keep an auto logbook.
If you follow the law as set out in this bulletin you will save several thousands of
dollars a year in taxes and get very good results in the event of an audit.
2200 Yonge Street,
Suite 221,
Toronto, Ontario
M4S 2C6
Tel.: (416) 493-0444
Fax: (416) 493-5929
Email: taxperts@pathcom.com
Website: www.taxperts.on.ca
U.S. and Canadian Personal Income Tax Returns,
HST, Corporate Returns,
Voluntary Disclosure Program,
Audits and Appeals,
Federal Tax Court.
William Howse B.A., LL.B. ( Barrister Solicitor and President, Taxperts Corp. )
Nick W. Ranieri Ph.D., LL.B. ( Manager of Audits, Taxperts Corp. )