Brief Introduction
The Government of Ontario has introduced new legislation as of October 01, 2020, bypassing Bill 45, Trust in Real Estate Act, 2020 which will bring in a plethora of changes to the old Real Estate and Business Brokers Act, 2002 by permitting the Personal Real Estate Corporations (PRECs).
PREC allows self-employed realtors in Ontario to have access to the advantages of operating their business through a corporation. These advantages include tax planning and estate planning options.
Current Scenario
Currently, self-employed realtors in Ontario were claiming their commission income through a T1 personal return under form T2125.
- A real estate agent currently earns commission income from the agency with whom he/she is associated.
- The income is taxed as personal income; however, the realtor is eligible for certain deductions. This income is included in total income underline 1500 and after deductions are included net income is reported underline 23600.
- The tax rate for reporting income is higher under personal as opposed to corporate income and the rates can reach close to 50% for higher-income earners.
Alternative Method Utilizing PREC
You now have the option to now set up a personal real estate corporation to claim your income through a T2 corporate return.
- A Toronto accountant forms a personal real estate corporation (PREC including yourself as a shareholder.
- They open up relevant accounts with the CRA such as a payroll account and an HST account.
- Maintain the bookkeeping and yearly financial statements of your PREC.
- Conduct year-end tax planning to determine how much of the earnings to distribute to the shareholder through either dividends or salary.
- File the T2 Return, Corporate HST return and the T4 or T5 for the shareholder.
- Effectively paying less total tax by retaining some of the income inside the corporation as retained earnings and lowering the individual tax bracket of the individual through only paying out the optimal mix.
Criteria
The bill also enlists various criteria and conditions in relation to the shareholder and incorporation requirements which must be met. We at SDG Accountants, your trusted firm in Toronto would help in the incorporation and seeing if all the prelims are met. Some of the criteria are:
- Shareholders who have voting rights must be licensed realtors in Ontario.
- The corporation name has to have the words “Personal Real Estate Corporations”.
- There is no limit to the liability of the personal real estate corporations (PRECs). Liabilities may extend onto the director, which in this case is the licensed realtor.
An Example of How PREC may be Advantageous:
Let’s look at the below example wherein we have analyzed how incorporating a personal real estate corporation can be beneficial for you:
Assume a realtor earned $500,000 and has the option to claim either through a corporation or as an individual.
If one was to claim $500,000 through a corporation while paying themselves a dividend of $230,000 this would be demonstrated as follows:
| Corporate Level – T2 | Incorporated |
| Real Estate Income Claimed in PREC | $ 500,000 |
| Corporate Taxes Payable | $ (70,000) |
| Dividend | $ (230,000) |
| After Tax Cash Flow in Corporation | $ 200,000 |
If one does go ahead and issue a dividend to oneself based on the above example, it shall be treated as personal income for that particular tax year and be subject to taxes on a broader level as demonstrated below:
| Personal Level – T1 | Incorporated/Dividend in Personal Return |
| Dividend Income – T5 Slip | $ 230,000 |
| Taxes Payable | $ (70,000) |
| After Tax Cash flow to Individual | $ 160,000 |
As per the chart above the net cash flow for a realtor who has incorporated is $2000,000(from corporation) + $ 160,000 (from personal) i.e. $ 360,000/-. However, if one chooses not to incorporate and follows the traditional approach the net cash flow shall be as under:
| Personal Level/T1 | Not Incorporated |
| Real Estate Income | $ 500,000 |
| Taxes Payable | $ (225,000) |
| After Tax Cash flow to Individual | $ 275,000 |
As we can see in the above examples, the net cash in hand is more when a corporation is set up. The objective behind passing this legislation is this only so that the realtors can have more cash in hand to be used for various economic considerations.
Advantages of Setting up a Corporation
The incorporation route, if taken by the realtor, may save a lot of tax as there is a substantial difference in the corporate and individual tax rates. Also, since the taxes can be deferred it can lead to investment opportunities under various schemes which can be beneficial in the longer run. Further, the realtors can make use of income splitting opportunities as well and transfer some income to the family who may have lower income. One must consider the TOSI rules as individuals under the age of 18 can be taxed at a high rate so it is best to contact a good Toronto accountant to determine if this may apply.
Conclusion
Incorporation is considered costly, and it is suggested to get in touch with us at SDG Chartered Professional Accountant and we can help you determine the benefit of incorporation and determine the right strategy.
To see if incorporating is an option for you, please contact SDG Accountant for a consultation.
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA,
CGA, MBA
