A PERSONAL REAL ESTATE CORPORATION (“PREC”) gives Real Estate Agents (“Realtors”) the ability to utilize the benefits of incorporation. Recently, Bill 104, the Tax Fairness for Realtors Act, has been passed to permit a PREC to be registered as a broker or salesperson.
A PREC can be considered a broker or salesperson provided that the owner of the PREC’s voting shares has the prescribed qualifications to be registered as a broker. Besides, the PREC must be employed by a brokerage to trade in real estate.
A PREC must satisfy the following conditions:
- A PREC must be incorporated under the Ontario legislation and must meet all the requirements of an Ontario business.
- The Realtor must own all of the voting shares in the PREC and be the only director and officer of the PREC;
- All PREC non-voting shares, if any, must be owned Realtors’ family members (spouse, parent, child);
- The PREC name must include “Personal Real Estate Corporation”;
- The PREC may only carry on business in the profession of real estate trading.
- The PREC should register for an HST account with CRA after formed. The Realtors’ current HST accounts do not transfer.
THE PRO AND CONS OF INCORPORATING A PREC
|BETTER TAX RATES In Ontario, the small business deduction allows up to $500,000 of real estate business income to be taxed at the lowest corporate tax rate of 12.2%, and 26.5% above that amount. PRECs would give real estate agents access to this lower tax rate. By contrast, the personal income tax rate is 53.53%. This will maximize Realtors’ income by realizing significant savings by paying less income tax.||ADMINISTRATION BURDEN The main disadvantage of incorporation is the administration of the corporation. The corporation requires legal and tax filings each year to remain in good steading with the authorities. This requires attention and is a time commitment for the Realtors.|
|TAX DEFERRAL A PREC will allow the Realtors to leave a portion of their profits in their PREC, thereby allowing Realtors to defer payment of taxes on such a portion of income until the money is withdrawn by the Realtors from the PREC.||OPERATING COSTS INCORPORATION COSTS Realtors will also need to incur legal costs to incorporate the business and prepare the annual minutes and other filings required by the legislation ONGOING COSTS There are annual legal filing fees to be paid to the lawyer as well as fees to have an accountant file the annual corporate tax return. BEFFA LAW can help you with the incorporation.|
|TAX SAVINGS THROUGH INCOME SPLITTING The PREC may employ and pay salaries to family members (spouse, partner, or child) for their services. The PREC may pay dividends to the family members. Income earned by family members may be taxable at lower individual rates, which would result in a reduced overall family income tax bill.||LOSSES MORE DIFFICULT TO USE When a Realtor operates a real estate business as a sole proprietor and incurs a loss, the Realtor can deduct that loss against other personal income. If a Realtor operates a corporation, the loss can be applied to the income of the corporation only.|
|ESTATE & RETIREMENT PLANNING Realtors can use the income tax deferral to plan for retirement. They can use excess funds in the corporation to purchase rental properties, investments, life insurance, or an Individual Pension Plan.
BEFFA LAW can help you draft a secondary will that deals with just your ownership in your corporation.
|PAY MORE TAXES In some circumstances, operating a business through a corporation could mean Realtors could pay more taxes than if operating as a proprietorship. This may occur when the small business deduction is not available to the corporation.|
|CANADA PENSION PLAN If Realtors are self-employed and have business income at or above $58,700 in 2020, they pay CPP of almost $5,796. If Realtors transfer their business to a corporation and begin paying themselves dividends they could eliminate this annual cost.||MAINTENANCE Failure to comply with the filing requirements of the Ontario legislation may result in dissolving the PREC, at which point the subject PREC must immediately cease to exist. Moreover, complying with Ontario laws on the maintenance of corporate minute books is necessary to avoid countless problems. BEFFA LAW can help you with the annual legal filings.|
|DEDUCTIONS FOR BUSINESS EXPENSES Deductible business expenses are not limited to the amount of commission earned or the other limitations imposed on sale expenses of commissioned employees. The PREC’s income for tax purposes is the profit, i.e. the sales commissions less reasonable business expenses.|
|LIFETIME CAPITAL GAIN EXEMPTION The LCGE allows a person who earns significant income from the sale of a small business corporation to deduct a significant amount, resulting in considerable tax savings. If Realtors want to take advantage of the lifetime capital gains exemption, the PREC needs to qualify as a qualified small business corporation.|
|LIMITED LIABILITY Operating your business through a corporation provides security against personal liability. It is more difficult for a creditor to go after the shareholder’s personal assets if the business defaults on its debts. However, the directors are still liable in some cases.||STILL LIABILITY By operating out of a PREC, Realtors will remain liable for services to clients and will be required to meet all associated obligations and responsibilities. If the PREC commits professional misconduct, the RECO may discipline the principal Realtor and the PREC by way of suspensions, cancellations, or restrictions on either licence.|
While Bill 104 has the potential to provide the Realtors with significant tax-saving opportunities, there are numerous financial considerations that Realtors will need to consider before choosing to incorporate a PREC.
The Realtors who are contemplating switching to a PREC should seek professional legal advice.
Complete trust in your loved one and a certain degree of spontaneity are important ingredients for a healthy long term relationship, but couples can decide to reinforce it with the help of a domestic contract.
What types of Domestic Contracts are there?
Cohabitation Agreements, Marriage Contracts and Separation Agreements are different types of domestic contracts. Couples use them to set out certain terms for their relationship, and to agree on the rights and responsibilities in case the relationship ends.
You and your partner can enter into a Cohabitation Agreement before or after you move in together.
What can a Cohabitation Agreement set out?
A Cohabitation Agreement can set out:
- how you want to organize some things in your relationship (e.g. keeping your finances separate).
- how property will be divided upon breakdown of the relationship;
- who owns property purchased during cohabitation;
- how much support will be paid if relationship ends;
A Cohabitation Agreement cannot set out:
- rules about custody and access for your children, which can only be decided after you and your partner separate.
What if I marry and I signed a Cohabitation Agreement?
If you and your partner get married after you have been living together, your Cohabitation Agreement becomes a Marriage Contract.
A Marriage Contract is a domestic contract for married couples. For couples who are planning to marry it’s known as Prenuptial Agreement (Prenup), while for married couples it’s known as Postnuptial Agreement (Postnup).
What can a Marriage Contract set out?
A Marriage Contract can set out:
- protection of pre-marriage assets and debts incurred by your spouse;
- children’s education and upbringing;
- control over budget and bank accounts;
- support obligations and variations of spousal support;
- pensions and RRSPs;
- equalization and division of property, including the matrimonial home.
! Be cautious when you include your home and property in a Marriage Contract. You could give up rights that you have under the law. It is important to talk to a family law lawyer who can explain your legal rights and options.
A Marriage Contract cannot set out:
- rules about custody and access to children.
- limits to spouses’ rights to live in matrimonial home.
! You and your spouse have equal right to live in your matrimonial home; it doesn’t matter whose name is on the house’s title.
What rights do I have under the law?
According to the law, married spouses who are separating have the right to equally share any increase in the value of their property that builds up during the marriage. The law sets out a calculation to determine what each spouse can legally get, called “equalization.” There are also rules about sharing the value of the matrimonial home, the home where you and your spouse were living as a family at the time of your separation.
You can sign a Separation Agreement to decide on different issues when you and your partner decide to separate. You can execute a Separation Agreement if you were married or if you lived in a common law relationship.
What can a Separation Agreement set out:
- rules about custody and access for children,
- financial support e.g. child support or spousal support, and
- how property will be divided.
Advantages of Negotiated Separation Agreement vs. Court Order Separation Agreement:
- Negotiating a Separation Agreement is cheaper, quicker and less stressful than going to court;
- You and your partner can control what is in your agreement;
- You and your partner may be more likely to follow the negotiated agreement because you decided together its content.
Disadvantages of Negotiated Separation Agreement
- If you are in an abusive or bullying relationship, it can be very difficult to reach a fair result and have respectful negotiations with your ex-partner. In abusive or bullying relationships, it is safer to go to Court for an Order.
- Going to Court to decide these legal issues may also help you protect your legal rights.
Can Domestic Contracts Be Enforced?
You can file your domestic contract with court, and it can be enforced as a court order, including any agreements about child and spousal support payments.
Why do I need to enforce my Domestic Contract?
You should enforce your contract in case there is a problem in the future or your partner stops following the agreement.
Does the court review my contract?
No. Court will not review your contract. Court reviews a contract only if one of the spouses challenges it. Generally, courts enforce domestic contracts.
! You should get legal advice before you execute a domestic contract. You must understand what is included in your contract, how your rights in the contract are different from your rights under the law.
How can I challenge the contract?
If you want to challenge your domestic contract, you have to apply to court.
! Courts do not like to interfere with domestic contracts and will not change a domestic contract just because it gives you less than what would you legally get.
When can I successfully challenge the contract in Court?
Court doesn’t usually change the division of the property in a domestic contract. However, court may change the spousal support sections if your situation is worse than at the time the contract was signed.
There are other cases when the contract can be set aside, but it is advisable to obtain legal advice to understand if your situation would qualify, and what might be the possible outcomes.
At Beffa Law we can help you:
- negotiate and draft cohabitation, marriage (prenuptial or postnuptial), or separation agreements;
- review and enforce pre-existing agreements;
- ensure the agreement is drafted in such way as to be legally binding;
- Independent Legal advice (ILA) for any domestic contracts.
Contact us today to learn how a marriage contract drawn up by experienced family lawyers can help protect your rights and assets upon separation. Call us at (416) 856-7631 to arrange for a confidential initial consultation.
Do you need a lawyer when you start your small business? Contact us to find out how our Beffa Law could benefit your business.
Types of Business Entities
There are 3 main business entities an entrepreneur should consider in Ontario:
A sole proprietorship is the simplest form of business organization, it is easily to set up and it is automatically created as soon as you begin to carry on business in your name. You are the sole owner, and fully responsible for all debts and obligations related to your business. All profits are yours to keep. Because you are personally liable, a creditor can make a claim against your personal assets as well as your business assets in order to satisfy any debts.
- Easy and inexpensive to register
- You have direct control of decision making
- Minimal working capital required for start-up
- You can enter into contracts with other people and entities
- You can hire employees
- Some tax advantages (deducting your losses from your personal income, and a lower tax bracket when profits are low)
- All profits go to you directly
- You are solely responsible for your actions and the actions of any employees you may have.
- You have unlimited liability (if you have business debts, claims can be made against your personal assets to pay them off)
- You cannot bring anyone as a partner & can be difficult to raise capital on your own
- Income is taxable at your personal rate and, if your business is profitable, this could put you in a higher tax bracket
- Lack of continuity for your business if you are unavailable
This is the best type of business organization to start off with. Then, as your business grows, you can decide if alternative business is more suitable.
A partnership is automatically formed when two or more individuals or corporations carry on business together with a view of profit.
The Partnerships Act (Ontario) determines the rights and obligations of each partner, unless the partners enter into a formal partnership agreement. In a partnership, your financial resources are combined with those of your business partners and put into the business. You and your partners would then share in the profits of the business according to the legal agreement you have drawn up. The partners are the sole owners and cannot be employees.
In a General Partnership, each partner is jointly liable for the debts of the partnership. In a Limited Partnership, a person can contribute to the business without being involved in its operations. A Limited Liability Partnership is usually only available to a group of professionals, e.g. lawyers, accountants or doctors.
While all of the benefits of the partnership accrue to the partners, each partner is personally responsible for the obligations undertaken in contracts entered into by the partners. This is important because it establishes the terms of the partnership and can help you avoid disputes later on.
Hiring a lawyer to help you draw up a partnership agreement will save you time and protect your interests.
- Fairly easy and inexpensive to form a partnership
- Start-up costs are shared equally with you and your partner(s)
- Equal share in the management, profits and assets
- Tax advantage — if income from the partnership is low or loses money (you and your partner(s) include your shares of the partnership in your individual tax returns)
- There is no legal difference between you and your business
- Unlimited liability (if you have business debts, personal assets can be used to pay off the debt)
- Can be difficult to find a suitable partner
- Possible development of conflict between you and your partner(s)
- You are held financially responsible for business decisions made by your partner(s)
A corporation has its own legal entity. Incorporation can be done at the federal or provincial/territorial level. To set up a corporation, you have to file articles of incorporation with the government. When you incorporate your business, it is considered to be a legal entity that is separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. Further, the corporation is taxed on its own, and you pay tax on what the corporation pays you, by salary or dividends.
It is always wise to seek legal advice before incorporating.
- Separate legal entity
- Owns assets and has the limited liabilities
- Owns property in its own name and ownership is transferable
- Has continuous existence
- May sue on its name and may be sued
- Can be an employer, you can be an employee
- Easier to raise capital than it might be with other business structures
- Possible tax advantage as taxes may be lower for an incorporated business
- A corporation is closely regulated
- More expensive to set up a corporation than other business forms
- Extensive corporate records required, including documentation filed annually with the government
- Possible conflict between shareholders and directors
- You may be required to prove residency or citizenship of directors