Tax Implications of Kickbacks from Investment Property Purchases in Canada

Navigating the tax implications related to purchasing investment properties can be complex. If you're considering buying a rental or investment property and are expecting a kickback from your realtor, you need to be aware of the associated tax implications. This blog post, based on our recent tweet series, demystifies the tax obligations linked with realtor kickbacks during a rental or investment property purchase in Canada.

Kickbacks as Income

Firstly, it's essential to understand that any kickback you receive from your realtor is considered income for tax purposes. This means that you must pay tax on that income.

For instance, let's say you buy a $1 million rental property. Your realtor, making a typical commission of 2.5%, earns a gross amount of $25,000. If you agree with your realtor to receive 1% of the 2.5% commission, equating to $10,000, this amount must be declared as income. Assuming a tax rate of 40%, you would pay $4,000 in tax.

You might think that the costs of buying the property could offset this income, but these costs are generally capitalized, not deducted. Therefore, after tax, your net gain from the kickback would be $6,000, not the full $10,000.

Implications for Realtors and Lenders

If you are a realtor providing a kickback, it's important to issue a T4A if your client is purchasing a rental or investment property. Lenders offering cash incentives to rental companies to sign a mortgage at a higher rate should also note that the incentive is not tax-free and must be declared as income when received.

What if the Property is a Personal Residence?

Interestingly, the tax implications change if the property in question is a personal residence. In this case, the kickback should be tax-free. However, it's unlikely you can deduct the kickback value from the purchase price for property transfer tax purposes. Typically, property transfers are based on consideration.

Closing Note

Understanding tax implications, especially in complex situations like investment property purchases, can be overwhelming. At Tax Heroes, we're here to make tax matters simpler for you. Follow us on Twitter for more tax advice and tips. For further guidance, don't hesitate to reach out to our experienced team.