Personal Real Estate Corporation- should you incorporate one?
Personal Real Estate Corporations
On October 1, 2020, Ontario Regulation 536/20 came into force, permitting Personal Real Estate Corporations (a "PREC") to be incorporated in Ontario. This is a welcome development as it allows real estate agents to incorporate their business as a PREC and enjoy certain advantages that this kind of corporation provides.
A PREC is essentially a corporation that receives remuneration earned by its controlling shareholder (the real estate agent). PREC's are not permitted to trade in real estate but they can provide the services of their controlling shareholder to a brokerage. Additionally, a PREC is allowed to receive remuneration relating to trade in real estate from the brokerage as long as it satisfies certain criteria listed in the Regulation (which can be found at the following link: Regulation).
There are certain benefits and drawbacks in incorporating a PREC, some of which are described below:
Lower corporate tax: One of the advantages of a PREC is the low corporate tax rate of 12.2% payable on a small business income of up to $500,000, compared to a high personal income tax rate of 53.53% payable on an agent’s earnings in the same salary range.
Tax Deferral Opportunity: Another benefit of a PREC is the provision made to defer income tax. Since real estate agents will only have personal income tax payable on money withdrawn from the corporation, they can decide to defer portions of their income into the future and receive it as salary or dividend (note that an accountant should assist in this kind of planning).
Income splitting opportunity: Although the real estate agent must own all voting shares in the PREC, family members can own non-voting shares and have dividends paid to them in order to lower the tax burden on the PREC. Income-splitting is however subject to Tax on Split Income Rules (TOSI) (additional information on TOSI can be found here, and this kind of a structure should be discussed with your accountant to ensure it is done in as tax efficient a manner as possible).
Incorporation costs: Their is a cost to incorporate a PREC, which costs vary depending on the law firm engaged to incorporate one.
Tax filing requirements: There is an additional tax return to be filed once an agent decides to incorporate a PREC (Corporate and Personal Income Tax Return).
Strict Compliance: Once an agent decides to withdraw money from a PREC, they are obligated to submit a T4.
Record-Keeping: It may be inconvenient for an estate agent to maintain accounting books for its PREC financial statements. Accounting fees may also be higher than they would be if the agent simply took a salary from the brokerage.
In conclusion, incorporating a PREC for your real estate business is dependent on a number of considerations, prior to deciding to incorporate a PREC you should consult with you tax professional and a lawyer. If you would like to discuss whether you should consider incorporating a PREC or to discuss next steps in setting up a PREC, please don't hesitate to contact Northview Law at 416-639-7639 or follow this link to book a free consultation.