Reimbursement for Relocation Costs (Real Estate Commission)

The entire matter of reimbursement for the real estate commission falling under the heading of “relocation costs” is very topical.

So, let’s have a look at it.

Toronto Property with $1,000,000 Selling Price

Let’s assume that a Seller owns a property in Toronto, worth a “million”. Is it really worth a million? Probably not. The net equity in the property is $950,000 after the Seller pays $50,000 in commission.

Equity Determination

This is the net figure after the real estate agent’s commission is removed. We are working with 5% here. If the property is to be disposed of, or sold, this commission will simply have to be paid. It doesn’t matter whether the Seller is cashing in the house to pay off back taxes, go on a vacation or buy another house. Net, net, on the way out, $950,000 is all the Seller is going to get and all the Seller will have to spend on something else.

Valuation of the Toronto Property

If this million dollar property is to be sold, there are essentially two prices:

  1. $950,000 without any commission, and
  2. $950,000 plus $50,000 in commission.

No one buying a property from a “FSBO” (for sale by owner) is paying more than the $950,000. If there is a commission, then that’s added on top. For mortgage purposes, the $950,000 house and $50,000 commission will be added together to provide the $1,000,000 valuation. But, that doesn’t change the Seller’s equity in any way, that’s still $950,000, no matter how you look at it.

Economic Incidence of the Commission

Who pays the commission? From a legal perspective, it is the Seller, however, from an economic perspective, it’s the Buyer.

It is only the Buyer who has any money here. It is the Buyer who comes up with the $950,000 for a FSBO deal, or the $1,000,000 for the house AND commission. There is no other source of the funds. Net, net the Seller gets his entire equity out of the house at $950,000, and it is the Buyer who comes up with the additional $50,000 for the commissions. And, the Buyer is told that he now has a million dollar property which can be appraised at that.

The $50,000 for the commission really never falls into the possession of the Seller. The Seller doesn’t get to decide what to do with the additional $50,000 on a discretionary basis. It’s not his money. He was not the source of it, and he didn’t decide who was to be paid that amount. It is purely a transactional expense which really doesn’t involve the Seller at all.

It’s not like there is a selling charge or fee that the Seller will pay one way or the other, even if his property doesn’t sell.

Corporate Transfers

Let’s assume that an employee works for a Company and they are receiving a promotion, the consequence of which they will be moving from Toronto to Ottawa, and that the Company wishes to grant them some money. This is like a “signing bonus” but they already work for the Company. What’s a tax efficient method of getting some money to them? Pay the real estate commission! If you give them a bonus, if you add to their salary, if you provide them with some kind of a grant or benefit, then this will be “taxable” in their hands. Net, net after tax, they will likely only receive $25,000 out of the $50,000. So, the “preferred method” would be to reimburse them for the $50,000 commission. This way, they get to keep the entire $50,000.

You can appreciate that for a long term employee who works in Toronto and is to be transferred to Sudbury for the next five years; that reimbursement of such a commission might represent a valid incentive.

Government Appointments

These are really like “job applications”. You would not ordinarily have to sell your house or your investment portfolio or anything else in order to accept a position. This is a “new job” and if you don’t want to apply for it, you don’t have to.

In accepting a position in Ottawa, which also has an active real estate market, there is no need to sell the Toronto house. It could be retained, used for other family members or rented out as an investment. One could rent in Ottawa. Owning in Ottawa is not a necessity.

Reimbursement of Land Transfer Taxes

This is another significant component. It amounts to about 2 % of the purchase price over $400,000. So, it too is sizeable. In Toronto there is a second tax, equal to the first. Justification for the payment on the Ottawa acquisition is ensuring that the employee will “own” rather than “rent”. Like the commission, there is a tax incentive for reimbursement.

Reimbursement of Cash Payments

It is difficult to imagine what “cash payments” would be reasonable under a transfer from Toronto to Ottawa. Possibly, some pizza deliveries! Ottawa is not that far away, about 5 hours, so how much pizza can everyone eat?

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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