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in their PREC, thereby allowing Realtors to defer payment of taxes on such a portion of income until the money is withdrawn by the Realtors from the PREC.||OPERATING COSTS INCORPORATION COSTS Realtors will also need to incur legal costs to incorporate the business and prepare the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.