Being a realtor in Ontario means many things. You are selling in one of the most fast-paced and lucrative realty markets in North America! You are selling in an economic climate that has exceeded any predictions and is growing. As is the case with many of your colleagues, you are inundated with data, paper, and seemingly endless streams of financial information.
At Tax Partners, we specialize in real estate taxation and small owner-managed businesses. Hiring a good accountant gives you the ability to partner with you to create a tax plan. Remember, it is not what you make, it is what you keep! There are many common traps that realtors fall into. You may have been in the business for a while, and are paying more tax than you should. Let us help you by calling us for a free initial consultation.
As of October 1, 2020, Personal Real Estate Corporations (PREC) has been permitted in Ontario. This is GREAT news for Ontario Realtors as it will allow those in higher tax brackets to defer (and potentially save) on taxes.
Full details on PRECs are found on the Ontario Regulation here. Below outlines high level information.
Criteria for Personal Real Estate Corporations (PREC) in Ontario:
- The corporation is incorporated or continued under the Ontario Business Corporations Act (OBCA).
- All of the equity shares of the corporation are legally and beneficially owned, directly or indirectly, by the controlling shareholder (the realtor).
- The sole director of the corporation is the controlling shareholder (the realtor).
- Each non-equity share of the corporation can be issued to family members class.
- There is no written provision by agreement or otherwise or arrangement that restricts or transfers in whole or in part the powers of the sole director to manage or supervise the management of the business and affairs of the corporation.
What is Personal Real Estate Corporations (PREC) in Ontario?
Personal real estate corporations are now a reality in Ontario after the Government of Ontario’s introduction of new legislation (Trust in Real Estate Services Act (TRESA)) that will modernize the old Real Estate and Business Brokers Act, 2002 (REBBA). Essentially, this means that individual Ontario real estate agents will now be able to incorporate their business. This would allow them to offer more services to clients, invest in new technology and create jobs in their community. More importantly, this opens up avenues for better tax planning for Ontario realtors, which we will discuss below.
What Do Personal Real Estate Corporations Mean for Taxes?
Does it mean Real estate professionals will pay less taxes with Personal Real Estate Corporations in Ontario? Or would they have the undue advantage after incorporating? The answer is NO. However, a Corporation opens up some avenues for better tax planning in the long-term. Our Canadian tax system is fundamentally based on the concept of ‘integration’. In simple terms, integration means that everyone should pay the same amount of taxes whether you are incorporated, or you are an individual filer.
At the moment, real estate agents report their income as a sole proprietorship (also referred to as self-employed). This means that you as an agent will have to pay taxes on the entire amount you earned minus your applicable deductions in that one year. However, with this change, you as an agent will be able to claim all the allowable deductions under your corporation. But, you will have the opportunity to defer your income taxes by not withdrawing all your profit out of the corporation in the same year. Income taxes will be payable at the corporation level, not the individual level. You will only pay personal taxes to the extent you withdraw money from the corporation.
Under the current system, if a real estate agent earns $250,000 in commissions, they have no choice but to pay income taxes on the entire amount minus applicable deductions. Under the proposed Personal Real Estate Corporation structure, if an Ontario realtor makes $250,000 in commission in any given year, they will first pay corporate taxes at the corporation level, and then personal taxes at their personal tax rate only to the extent that they withdraw funds out of the corporation for personal use.
High-income earners who do not need their entire earnings immediately, there is an opportunity to defer personal income, and therefore personal taxes, into the future. This would be especially beneficial to real estate agents whose earnings can fluctuate significantly year over year depending on the timing of their closings.
Should a Real Estate Agent Incorporate? What are the Advantages and Disadvantages?
Incorporating your real estate business has its advantages and disadvantages summarized below:
Advantages of Incorporation:
- Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% personal taxes on entire earnings.
- Tax deferral opportunities – This allows you to grow money on a tax deferral basis through various investment vehicles.
- Income splitting between spouse or family member class. Of course, be aware of TOSI rules (Tax on split income)
Disadvantages of Incorporation:
Disadvantages of incorporation are usually compliance-related costs:
- Incorporation charges – This could range from $1,000 to $2,500.
- Higher accounting fees – You might be paying a higher fee for corporate filing.
- Stricter compliance – You will be required to submit T4 if you decide to withdraw money through payroll for yourself and your spouse. Also, you must make remittance payments every month to stay in compliance with the Canada Revenue Agency.
- Primarily for high-income agents – No advantage if an agent needs all their earnings for personal use – that is, the advantages only exist for high income earning agents who can afford to leave some earnings in the corporation and pay lower tax rate.
The advantages of incorporation outweigh the disadvantages despite the higher compliance and accounting cost.
In short, this is a progressive step by the Ontario Government to bring fairness among all professionals. Real estate agents who are high-income earners could see significant tax impact from this change. Despite this, just because you can create a PREC does not mean you should. Working with us will provide you with sound knowledge so you can make the right decisions and understand exactly what you are facing.
Contact us and we will be more than happy to assist you – email@example.com or by phone at (905) 836-8755.