Is the rebate from a cashback brokerage taxable as income?

Please be advised that you should not consider the following a formal legal opinion, my answering this question does not constitute the formation of a lawyer-client relationship, and if you would like advice on your particular situation, you should retain a tax professional to advise you, which could, but doesn't have to, be me.

The thing to understand about this question is that has two elements which make it potentially complex. The first is that it is situation-dependent. The second is that there is very little direct caselaw on the subject, meaning there is no simple and obvious prior decision to which we can point.

The general answer for individuals buying homes in which they will live is no, any cash back you receive from a realtor will not be taxable as income. Corporations and individuals buying for profit have more complex answers. I will only consider cash back in the context of buying here, because in the context of selling it doesn't make any sense; you'd negotiate a lower commission, not pay and get some of it back.

Let's start by considering what is going on with a cashback rebate. When you retain an agent in a buying scenario, one of the terms on the standard Buyer's Representation Agreement (BRA) is that the commission payable is either a percentage of the value of the property purchased, or a fixed amount, and the agent is allowed to take any amount offered by the listing agent, with the client obligated to make up any shortfall. Cashback arrangements work by having the commission be less than the cooperating agent commission offered by the listing agent, so there is money to return to the buyer after the agent has been paid.

Now let's consider how income taxes work in this situation. Sales tax (HST) is not being considered here. S.3(a) of the Income Tax Act, R.S.C. 1985, states that income must come from a 'source' which is an office, employment, business or property. Since getting cash back from an agent isn't an office, employment or property, the question turns on whether it is a business. This definition is found at s.248(1) of the ITA, and states that it "includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment." That definition says what a business includes, but doesn't really define a line between things which are and aren't a business, so to find that, we have to turn to case law. Specifically, R. v. Stewart, 2002 SCC 46, a decision of the Supreme Court of Canada.

The question of what is a business, and when should expenses be deductible and income taxable is examined in detail by the Court in paragraphs 48-60. In it, the Court lays out a two-step test to determine if a source of income is taxable:

(i)   Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?

(ii)   If it is not a personal endeavour, is the source of the income a business or property?

Buying a home for personal occupation is clearly a personal endeavour. People who undertake more work in return for a greater cashback are not engaged in a business, since they are not selling anything to the public at large, but are working to reduce the cost of a personal transaction. Some services even offer total cash back in return for doing no work, such as Zero Value Realty. In that case the buyer has undertaken all the responsibilities of their own purchase. This does not create a business, and does not create taxable deductions for the buyer. The only reason this arrangement is necessary is because listing agents will not normally refund the buyer's agent commission to an unrepresented buyer, so buyer's who do not see value in having a buyer's agent must find an agent willing to refund all, or nearly all, of the buyer's agent commission. Since there is no business, there is neither income tax on the money received, nor available deductions for money spent in the course of finding a personal use property.

I have seen that some buyers who used cash back agents received T4As, and that the income was reported by the agent's brokerage to CRA, and thus had to pay tax on it. This is actually a mistake on the part of the brokerage, which should never have issued a T4A to these buyers. The brokerage had to deal with the fact that it received a commission, but was only entitled to keep part of it, so it needed a way to make sure they didn't have to pay tax on the whole commission. Their answer to this was to use a T4A (probably an accountant's idea; tax accountants love filing more forms) to create a deduction. The other side of this is that it ostensibly creates income in the hands of the buyer. What the brokerage should have done is simply transfer the balance to the buyer, and rely on the terms of the contract with the buyer to show that only the amount agreed is the income of the brokerage, and was the only money retained, so that is the only part which is taxable. If you have received a T4A for a buyer's commission cashback you definitely face an uphill battle with CRA, who also love following forms and resist when someone claims that the filed form is wrong and they don't owe tax. Frankly, the reasoning outlined here is pretty far above the level of most CRA auditors I've encountered, and in order to win the argument that the cashback isn't income, you would likely at least need to appeal the matter within CRA, and possibly to the Tax Court of Canada so the matter gets into the hands of a Department of Justice lawyer.

Having considered this, we can now look at the one case on this subject decided by the Tax Court of Canada, Zhang v. The Queen, 2020 TCC 49. There are three elements to this case which limit its use for precedential purposes: First, Zhang was purchasing properties as investments, not personal use. Second, the trial was held under the Informal Procedure, which means the Court will not weigh it as heavily when considering it in the future. Third, the appellant self-represented, so her argument was not made with the benefit of a professional understanding of the tax law. Before I get into the case, I should mention that there is a presumption in tax disputes that when the Minister (CRA) makes an assumption of fact, he can rely upon it and must be 'demolished' by the taxpayer for a judge to consider the facts to be other than as the Minister has assumed. In the case, the taxpayer bought four condos in Toronto as investments, and received a commission rebate from her brokerage. They issued her a T4A slip, but she did not think it was payable, and testified that she thought it was a gift. This is a spectacularly bad argument. Her testimony was inconsistent, and she failed to provide any evidence regarding the transactions to buy the properties, which gave rise to the payment. She also did not call her realtor to testify, from which the Court drew a negative inference. The judge says repeatedly that there is not evidence before him to overturn the assumption of the Minister. He also describes the taxpayer as inconsistent and inattentive, not qualities which make one a convincing witness. For all of these reasons, I do not consider this case especially useful in determining the taxability of cashback commissions.

Thus, for individuals buying properties for their own use, I conclude that any money received as a cashback from a realtor would not be considered taxable income. It does not arise from employment, business or property, but rather a personal activity. People buying for personal use are not typically in the business of buying and selling houses, so the payment is not an inducement to form a business relationship, or any other similar class of payment which would be taxable in a purely business case.
The fact that it is a rebate at all, rather than just a reduced payment, is down to the convoluted way commissions work in Ontario. The Buyer must pay the Seller for the property, through their respective lawyers. The Seller must then pay his agent, usually done by the Seller's brokerage keeping the deposit originally paid by the Buyer before lawyers were retained, and supplemented from closing funds from the Seller's lawyer's trust account. Then the Seller's brokerage pays the Buyer's brokerage. A cashback Buyer's brokerage then completes the circle, by giving money back to the Buyer. This is probably the least efficient and most convoluted way to compete on price, but I believe the obfuscation in the system is a feature, not a bug. Realtors like the whole system complex and murky, because it hides the amount they make. In the UK, for example, there is a rule which requires anyone who retains an estate agent to pay that agent directly. As a consequence, buyer's agents are almost never used, and the total commissions on property purchases are around 1%.

Briefly, let's now consider the case of individuals buying for the purposes of 1) renting and 2) flipping the property. For tax purposes, these are actually quite different. If someone is buying for the purpose of renting the property out, it is definitely done in the course of business, so the Stewart criteria are satisfied in that the rebate is taxable income. We then need to consider whether it is on account of income or capital. In this scenario, because the house is purchased to be rented out, the return of commission is part of the calculation for the cost of the acquisition of the property for the purpose of calculating capital gains taxes. Capitals gains or losses are calculated like this: sale price - costs of sale (lawyer, realtor, advertising) - purchase price - costs of purchase (lawyer, transfer taxes). The rebate would be counted as decreasing the amount you could claim for the costs of purchase, making the overall capital gains taxes greater. Let's use an example to flesh this out. Rented house sold for $1,000,000, originally bought for $500,000, and always used as a rental. $45,000 of sale costs, and $15,000 of purchase costs. The capital gain is thus $1,000,000-$500,000-$45,000-$15,000, or $440,000. Let's say the Seller paid a 5% commission when you bought the property from him, so 5% on a $500,000 sale, or $25,000 (I'm excluding HST here for the sake of easy numbers, and because HST can't be rebated for a host of complex reasons). If the buyer's commission was fully rebated, then you'd get back $12,500. This means your costs of acquisition are $2500 instead of $15,000, and the capital gain when you sell it would be $452,500. Remember: capital gains taxes are calculated and payable only when you sell the capital asset. It's a capital asset because it's used to make income (rent), not itself traded for profit. Capital assets are the trees, income property is the apple.

Now let's consider what happens in the case of house flipping. This is very similar because in that case the rebate is similarly a reduction in the cost of purchasing the house for the purpose of resale, which means it increases the income tax when you sell it. In this context the house is considered an inventory, and under the matching principle you claim the cost of acquisition as a deduction against proceeds of sale at the time of sale, and the difference is income if positive or a deductible loss if negative.

Thus, in no scenario is the rebate of realtor fees provided by cashback agents considered 'income' in the sense of it being a separate amount of income to declare. In all cases it will be tied to the acquisition of a particular asset, and the taxability of the rebate is tied directly to that asset and how you intend to use it. For more complex scenarios, such as if you change a property from personal use to income, or vice versa, while you own it, I recommend retaining a tax professional to advise you.