Table of Contents
Key Takeaways:
- As of October 2020, real estate salespersons or brokers in Ontario can now incorporate their business income through a A Personal Real Estate Corporation (PREC)
- A PREC has many advantages including tax deferrals and income splitting
- There are many factors to consider when exploring PRECs, including amount of income vs. expenses, family income, and future business plans
- Incorporation comes with costs and reporting requirements so consult an accountant to know if it’s a good business decision for you
In late 2020, the Ontario provincial government passed Bill 145 of the Legislative Assembly of Ontario which brought forward new rules for the formation of Personal Real Estate Corporations (PREC). With the passage of this bill, real estate brokers and salespersons can incorporate and access the many business advantages of incorporation, including tax and income planning benefits.
In this article, we’ll cover what a PREC is and what it means for realtors, some benefits of incorporation for realtors, and how to know if incorporation is right for you.
What is PREC?
A Personal Real Estate Corporation (PREC) is a corporation that a real estate salesperson or broker may establish that is permitted to receive returns directly from a real estate brokerage. Essentially, a PREC allows a real estate broker to earn their business income through a corporation under the Ontario Business Corporations Act.
Like any other corporation, a PREC will be considered a separate legal entity from its shareholders. This will allow Ontario real estate agents and brokers to benefit from a wide range of tax planning and other opportunities that may allow them to retain a greater share of their income.
While setting up a PREC comes with a number of considerations, there are many benefits of incorporation for realtors in Ontario through a PREC.
What are the benefits of a PREC?
Tax Deferral
One of the most significant benefits of forming a PREC is tax deferral. By holding earnings in a PREC, realtors can take advantage of corporate tax rates, which are lower than personal income tax rates.
In Ontario, the combined federal and provincial corporate tax rate is 12.5% on the first $500,000 of active business income. Any income above $500,000, is taxed at the general corporate rate of 26.5%. Personal income tax rates in Ontario, by contrast, can go up to 53.53% on income over $220,000. That’s a major difference in the overall tax realtors would be required to pay on their income.
Forming a PREC also allows realtors to leave a portion of their business income in their PREC, deferring the personal taxes on this income until it’s paid out to them as a salary or dividend. Alternatively, this income can be kept in the PREC until retirement, at which point it would be subject to a lower marginal tax rate.
Income Splitting
Another advantage of incorporation for realtors in Ontario is the option that PRECs provide for income splitting.
While a PREC is required to have one controlling shareholder that owns all the equity and/or assets of that corporation, it also provides the option for all non-equity shares to be owned by a family member i.e. spouse, child, parent, or a trust for a minor child. This means that realtors can split the business income across their family members that are actively involved in the business, to achieve certain tax benefits and bring down the family’s overall tax burden.
Though, CRA has certain rules to limit income splitting to aforementioned through virtue of Tax on Split Income (TOSI) which may result in being taxed at the highest rate with interest and penalties to a total of 75%-90%. Speak to FShad CPA Professional Corporation to best utilize this strategy.
**Note for SARAH* Perhaps try incorporating “TOSI to be discussed in later post” or something – You may want to reword what I inserted
How to know if incorporation into a PREC is right for you?
Forming a PREC is a complex task with a number of considerations that may differ depending on a realtor’s individual circumstances and that can impact the overall advantages.
Some things to consider when thinking about setting up a PREC include:
- Income vs. Expenses: Are you earning more than what you need to meet your daily living expenses? If yes, it might be a good idea to hold the excess cash in a PREC to reap the tax benefits, as well as get one step closer to claiming the lifetime capital gains exemption.
- Overall Family Income: Could you benefit from distributing business income to your family members? If there is an uneven distribution or flow of income in your family, it might be possible that you’re paying higher income tax rates than you if you split the income across family members and thereby lower your overall tax payments
- High Non-deductible Business Expenses: Are you incurring significant business expenses that are either not deductible, such as life insurance premiums, or only partially deductible, such as meal and entertainment expenses? If yes, there could be an opportunity to save on these expenses by writing them off to a PREC.
- Future Plans: Are you just starting your real estate career or are you heading towards retirement? Do you want to save more money for retirement? A PREC is a great way to hold earnings and expand your retirement portfolio. The tax deferral benefits are a great way to help plan for retirement.
The rules for professional corporations differ slightly across provinces and professions. It is important to work with your accountant and lawyer when you consider forming a PREC.
FShad CPA Professional Corporation can provide information and consultations as you explore the potential benefits of a PREC. We’ll help you navigate through the many factors that affect your tax payments, including the province you live in, your personal income, and whether or not it’s beneficial for you to incorporate.
Book a consultation today and get started with our team of expert accountants!
FShad CPA Professional Corporation
Call us at (844) 982-4700 or send us an email to info@shadcpa.ca
Woodbridge, ON
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.
