On October 1, 2020, the Ontario government announced new regulations and amendments to the Real Estate and Business Brokers Act, 2002 (REBBA) that allow real estate brokers and salespersons to incorporate “personal real estate corporations” (“PRECs”).
Real estate professionals, like lawyers, doctors, and accountants, are now able to earn income through a corporation. If used correctly, a PREC can assist with tax planning and offer a myriad of other benefits. This article highlights some of the regulatory complexities of setting up a PREC, and some of the benefits that can be utilized by real estate professionals if the PREC is set up correctly.
To qualify as a PREC, the corporation must:
- Be incorporated under the Business Corporations Act (Ontario);
- Have one controlling shareholder, director, and officer, who is a registered broker or salesperson;
- Have all non-equity be owned by family members of the controlling shareholder or the controlling shareholder; and
- Enter into a written agreement with the controlling shareholder and the brokerage which will govern the relationship among the parties and remuneration.
Incorporating opens the door to many advantages:
- Corporations are separate legal entities from the owners (i.e. shareholders)
- Brokerages can directly pay the PREC, which will provide the ability to build up cash reserves for “down” years, leave of absences, or retirement of the shareholder.
- Lower tax rates for corporations compared to individuals:
- In 2020, the small business deduction tax rate is 12.2% versus the highest personal tax rate of 53.53%.
- Tax Deferral:
- For certain individuals (specifically for individuals who are earning at least $220,000), there may be up to 41% in tax deferrals. The registered broker or salesperson will only be taxed personally for the actual money paid out from the corporation. This can be paid either by issuing dividends and taking advantage of the dividend tax credit or through salaries and thus reducing corporate income tax.
- Opportunities on income splitting:
- A PREC can provide the opportunity to split business income among family members to lower the combined taxes within your family. Generally, income splitting options available to PRECs include paying family members wages or dividends (subject to Tax on Split Income restrictions).
- Capability for expenses being paid out of the corporation using lower rate after-tax dollars.
- For example, if you had $1,000 of income in a corporation, you would have after-tax dollars available of $875 versus only $465 if the business is held personally. These after-tax dollars could be used to pay for expenses such as life insurance premiums.
- Transfer of assets.
- Any asset that a registered broker or salesperson currently owns can be transferred into the corporation and funds can be taken out of the corporation tax-free up to a certain amount as a result of the transfer.
In order to take advantage of the benefits a PREC can offer, proper consideration and planning is required from a legal, accounting, and administrative/cost perspective. The lawyers at Ross Rumbell Business Law and the tax professionals at SBLR LLP would be pleased to discuss the legal requirements, tax benefits, and limitations of incorporating a PREC for your practice.
If you are interested in learning more, we welcome you to connect with us for a complimentary consultation.
*Please note that the foregoing is not and should not be construed to be legal or tax advice.