You earned a lot of money this year. Here are a few ideas for keeping more of it come tax time
What appeared in March to be a disastrous year for mortgages quickly turned into the busiest year most Canadian brokers and brokerages have ever seen. Whether through purchases or refi’s, Canadian mortgage pros were knocking out transactions right and left, racking up commissions like nobody’s business.
The downside of earning all that revenue in 2020 is that tax season 2021 is lurking just around the corner. Brokers experiencing unprecedented success, as well as agents who jumped into the fray in the midst of a record surge in business, should already be looking for ways to keep as much of their hard-earned cash as possible once April 15 comes and goes.
“There’s no question that if you made a lot more money this year than you have previously, your tax liability’s going to be much bigger. In some cases, people haven’t planned for that,” said Chris Karram, managing partner at SafeBridge Private Wealth. “Generally speaking, you’re in a good position if you’ve been able to make more money this year. Be proud of that, but at the same time, do what you can to minimize that additional tax liability you’re going to be facing.”
Karram shared three tips for brokers looking to either whittle down their looming tax bill or get a head start on their returns.
1. Account for every dollar
Proper accounting is critical for brokers who don’t want to pay more at tax time than is absolutely necessary.
“You’d be surprised by the amount of people who just don’t track their spending properly and could be leaving 10, 20, 50 thousand dollars on the table by not knowing where the receipts are,” Karram said.
In an excessively busy year, most brokers are unlikely to be dedicating their few minutes of free time each week to bookkeeping. That’s why Karram suggests hiring a bookkeeper or reputable accounting firm to manage the in- and outflow of cash, record expenses properly, and allocate which money is being used for business expenses and which is for personal use.
“It’s so important, because when it comes to tax time, you want to make sure you’ve got every dollar you can allocated in the right way. A big part of that is properly tracking it,” he said.
For agents new to the biz who surprised themselves with how much they earned this year, Karram said now is the time for them to start creating good bookkeeping habits. He got his own start using Quicken Books to track his cash flow.
“I was able to build and define how much I wanted to make while, at the same time, track on a go-forward basis how I would spend those dollars as well,” he said, adding that keeping meticulous records can help brokers save the money they might normally spend on accounting services.
2. Incorporate
Paying a corporate rather than a personal tax rate is one of the most effective methods a broker has for cutting down a tax bill. But incorporation isn’t for everybody.
“If you’re spending everything you’re making, incorporating’s not that relevant,” Karram explains. “The reason someone would consider incorporating is mostly because they want to be able to build some of their investments and their assets inside the corporation because they’re not spending it all on consumer-driven needs.”
Some brokers avoid incorporating because they feel the process may be too complex or expensive. That may have once been the case, but not today. Karram said that with the help of a good lawyer, incorporation tends to take only a few days. When he incorporated his own businesses; it took about a day each time.
“If you have a lawyer, work with them directly,” he said. “In most cases, they know your business inside and out. As a result, for them to set something up should be very, very simple – especially if they’re already working with your accountant.”
3. Tax-free insurance account
Karram suggests a sophisticated, yet powerfully simple strategy for incorporated brokers, something he calls “a TFSA on steroids”: a tax-free insurance account.
Like a TFSA, holders of a tax-free insurance account can enjoy the fruits of investing or accessing their money without penalty. Because the account is corporately funded, the money grows tax-free and is taxable at the corporate rate of 12.5%. Unlike a TFSA, there are no contribution limits.
It’s a strategy Karram said has proven popular with his broker clients.
“All we’ve done is shift money from taxable to tax-free, while still maintaining full access,” he said. “Anybody making money in the mortgage business that we’ve talked to loves the idea. It’s a vehicle worth exploring.”
Looking ahead
Because of the enormous cost of carrying the Canadian populace through the first eight months of COVID-19, the federal government will inevitably need to find ways to foot the bill. Karram said some Canadians may eventually be asked to pay a wealth tax, an increased HST, or significantly higher capital gains taxes.
“It’s not so much about how disruptive [COVID-19 has] been as of right this moment,” he said. “It’s more a matter of what it’s going to do going forward.”
