The Real Estate and Business Brokers Act (REBBA) of 2002 has been updated to allow for the formation of PRECs (Personal Real Estate Corporation). This is good news for Ontarian realtors who can now enjoy the tax planning benefits associated with owning a corporation!
This may result in the offering of additional services to clients, the creation of new jobs, and tax planning and income splitting benefits. First, let’s examine the tax implications of a PREC.
PREC Tax Implications
A PREC doesn’t guarantee that real estate professionals will pay less tax, but it does open up opportunities for better tax planning that realtors can enjoy long-term.
Prior to October 2020, real estate agents were only allowed to report income as a sole proprietorship. They pay personal income taxes on everything they earn in a year, minus some applicable deductions for expenses incurred. Operating a PREC allows you to defer personal income taxes by holding profits within your corporation – you do not need to personally withdraw the full amount you earn each year. A PREC can also claim all applicable expanses and deductions as a typical corporation would. Finally, a PREC’s income is taxed at corporate, rather than personal, income tax rates.
So, if you are a high-income earner and there’s no need for you to access all your earnings at once, a PREC would allow you to defer your personal income taxes into the future.
Advantages and Disadvantages of Incorporating
If you are a real estate agent, you may be wondering if it is a good idea to incorporate. To help you decide, here are some advantages and disadvantages to forming a PREC.
- A PREC’s earnings are taxed at the corporate tax rate (12.2%). You pay individual taxes only on the amount you withdraw each year, rather than being taxed at the individual rate on your total earnings. You should speak with your tax professional to determine your combined corporate and personal tax rate.
- Opportunities for tax deferral.
- Opportunities for income splitting among family members.
- Any income that is kept in the PREC can be invested. This allows your investments to grow faster as you have more capital to invest, due to the tax deferral.
- Opportunity to decide whether you want to contribute to Canada Pension Plan (CPP) or not. As a corporation you would be contributing the employer CPP and employee CPP portions. You can opt-out by paying yourself dividends.
A holistic approach to tax planning is the ideal scenario when you own a corporation. Tax planning can inform how much salary and/or dividends you should be taking from your business to help reduce your overall tax burden between your corporate and personal taxes.
- Incorporation charges between $1,000 and $2,500.
- Compliance requirements when submitting T4’s if you decide to withdraw cash through payroll for you or your spouse.
- Monthly remittance payments should be made to comply with Canada Revenue Agency.
There is increased compliance around incorporating because of the various ways you can take money out of your business. Along with that, you should expect to have a higher investment in your accounting to ensure that your financials are accurate when it comes time to prepare your corporate and personal tax returns.
Despite higher compliance fees and the cost of incorporating, the advantages of owning a PREC are significant. Tax deferral is the main benefit of incorporating, along with the opportunity to avoid having to contribute the employer and employee portions of CPP. Real estate agents earning more than they care to take home should consider registering a PREC. However, incorporating is not for everybody. It’s best to consult with your lawyer and accountant to decide if a PREC is right for you.
We’re here to help you make the most tax-efficient decision for your personal situation. Book an appointment today to find out how we can help you!