On March 4th, 2020 Bill 145 of the Trust in Real Estate Services Act received royal ascent, permitting Ontario real estate salespersons and brokers the legislative permissions to incorporate. Supporting legislation finally passed on October 1st, 2020.
The Trust in Real Estate Services Act creates a number of legislative changes for Ontario real estate salespersons and brokers. In this article, we will focus on the PREC(Personal Real Estate Corporations) which will permit Ontario real estate salespersons and brokers to incorporate their business interests.
Before deciding if incorporating is right for you, we have some items below for you to consider.
Is incorporation right for you?
As is the case with any other corporation, a PREC once established is considered a separate legal entity from its shareholders. Under this classification Ontario real estate salespersons and brokers open a plethora of tax planning and succession planning opportunities.
From an high-level view, you may wish to explore the potential benefits of incorporation IF you’re an agent who
- Has income in excess of personal spending requirements
- Wants to take advantage of income tax deferral opportunities
- Wants to invest excess cash in income-producing assets
- May be able to split income with family members
- Wants to take advantage of the $883,384 lifetime capital gains exemption
In addition, incorporating presents opportunities for Ontario real estate salespersons and brokers to structure their corporate holdings in such away that surplus cash held within the corporation can be used to reinvest into tangible assets like real estate holdings as well as intangible assets like stocks, bonds, tfsa’s and self-directed RRSP plans invested in the shareholders name(s).
Looking at incorporating from a succession perspective, forming a PREC may also create opportunities for real estate salespersons and brokers to take advantage of estate planning opportunities when they retire.
To determine if a PREC is right for you and your family take advantage of our business advisors and our 20-minute free consultation.
Exploring the opportunities
Below we will provide an illustration with the intent of helping you better understand the benefits of incorporating and the possibility of providing significant income tax deferral opportunities.
For a real estate salesperson or broker in Ontario who remains unincorporated, the highest marginal tax rate on earnings in excess of $220,000 is approximately 53.5 percent. While earning income through a PREC, however, would create a provision for the corporation to pay tax on the income earned inside the company – and the corporate tax rates range from 12.5 percent to 26.5 percent in 2020. The corporate structure would allow excess income to be invested inside the company, with personal taxes only applicable to funds you draw out for the purposes of salary or dividends.
In addition to the tax provisions mentioned to you above, you may be able to split income with your family members, such as a spouse or adult children. As an example, your family members could own non-equity shares of the corporation, which would create the provision of them earning dividends from the business. You could also pay lower-income family members salary or wages, which would be taxed at their personal tax rates – with the assumption that they will be taxed at a lower rate than you.
What to consider when incorporating
Some considerations that you should be aware of when considering setting up a PREC. For instance, for a Canadian taxpayer to take advantage of the $883,384 lifetime capital gains exemption, the PREC needs to qualify as a qualified small business corporation. As such, retaining too much cash in the PREC or investing in non-qualifying assets could put the status of the PREC offside if the entity is sold to a third party.
Further consideration by shareholders for the tax on split income rules where there are attempts to split income with family members.
Consideration should also be made for the costs of structuring a corporation as well as the ongoing maintenance costs for maintaining accurate books and additional costs for corporate tax filing.
To avoid these obstacles and keep costs under control, proper planning is essential. If you’re considering setting up a PREC, a Premier Professional Accountants advisor can help you determine if incorporation makes sense for you, help get you up to speed about your compliance requirements and provide you with a range of tax planning opportunities. Over the coming months, we’ll also keep you updated on new guidance and clarification around this legislative change.