Should Ontario real estate agents incorporate?
As of October 1, 2020, legislation passed in Ontario allows real estate agents to incorporate and earn their commission income through a Personal Real Estate Corporation (PREC). Personal real estate corporations allow real estate professionals to access the business advantages of corporations and similar benefits available to other professionals, such as dentists, accountants and lawyers.
More about PRECs
- PREC must be incorporated under the Ontario Business Corporations Act.
- PREC is a regular business corporation. It is not like other professional corporations. There are no restrictions that limit its ability to carry on other income-earning activities, such as passive investing or other entrepreneurial ventures.
- There are no restrictions on naming. The name of the corporation does not need to include "PREC" or “Professional Real Estate Corporation" or "Professional Corporation".
- PREC will have a single controlling shareholder who must be a real estate broker or real estate agent registered with the Real Estate Council of Ontario.
- The controlling shareholder must make all the decisions for the PREC. There should be no written agreement or other arrangement that restricts or transfers powers of the controlling shareholder to manage or supervise management of the business and affairs of the corporation.
- Any non-voting shares must be owned directly or indirectly by family members (spouse, children, parents, trust for minor child) of the controlling shareholder.
- Only one registered real estate professional may own equity shares of the PREC, and thus control the corporation. However, non-voting shares may also be held by another registrant if they are a family member of the controlling shareholder.
Benefits of setting up PREC
Tax Deferral – Key benefit of corporations
For a high-income Ontario realtors who donot need their entire earnings to take care of their personal obligations, incorporation could result in tax deferral into the future. Tax deferral allows high-income earners to shift their personal taxable income from their peak earning years to their retirement years.
One of the primary benefits of setting up corporation is the ability to defer income tax. The tax rate on small business income up to $500,000 in Ontario is lower at 12.2%. Profits left in a PREC generally qualify for this low rate. As an example, personal income at $100,000, is taxed at 43.41%; $150,000 at 44.97%; $200,000 at 48.19%; and over $220,000 at 53.53%. After-tax profits in a corporation can be paid out as a dividend at rates of up to 47.74%, depending on the recipient’s other income for the year.
Income splitting with family members
A PREC can provide the opportunity to split business income among family members to lower the combined taxes within your family. Generally, income splitting options available to PRECs include paying family members wages or dividends. Family members need to be performing reasonable duties in the corporation. Also, given the limitations imposed by Tax Split Income rules (TOSI), consideration should be made in respect of whether dividends paid to family members will be subject to tax at the highest marginal rate.
Investments within the corporation
If a realtor can establish a PREC and accumulate savings inside the corporation, those savings can be invested in stocks, bonds, GICs, mutual funds, ETFs or even investment real estate.
Most expenses that are tax deductible to a self employed real estate agents will also apply for an incorporated realtor. So, a PREC might not provide the ability to claim more tax deductions.
Incorporation costs with a corporate lawyer may range from $700 to $3,000. Annual bookkeeping and accounting costs could cost an incremental $1,000 to $3,000 over and above a realtor’s current bookkeeping and accounting costs.
Holding companies for Real estate investments or other associated companies
Majority of real estate agents have real estate investments either held individually or in a holding company. These holding companies might earn passive income (i.e. investment income) in excess of $50,000 in its prior year. Any passive income above $50,000 will reduce the Small Business Deduction available to that corporation. In Ontario, the combined rate will still be considerably lower compared to the highest personal rate in Ontario of 53.53 per cent so PREC will provide ability to defer taxes.
If you or your spouse own other businesses, PREC may not be able to access all of the lowest corporate tax rate of 12.2 per cent on the first $500,000 of net taxable income in the PREC. The company might need to pay 26.5 per cent corporate tax rate.
Our professionals at Awerix CPA can assist in determining if PREC is right for you, and if you choose as your accountant we can lessen the administrative burden associated with having a PREC.
Awerix CPA Professional Corporation. All Rights Reserved