Bill 145, Trust in Real Estate Services Act, 2020 received royal assent on March 4, 2020, meaning that real estate agents in Ontario will be allowed to create their own Personal Real Estate Corporations (PREC). The time has finally come for real estate agents to enjoy the numerous benefits of a regulated industry, including reduced income tax and improved professional standards.
This is a tremendous victory for realtors as Bill 145 poses a very exciting opportunity to save on tax expenses. Here’s how:
Bill 145 breakdown
The main difference between earning income through a corporation versus a business is that you and your corporation are considered separate tax entities (compared to your previous filings where you and your unincorporated real estate business were only considered one taxable entity).
With a corporation, you need to file both a personal and corporate tax return, and income earned through your corporation will be taxed differently than income earned through your previous unincorporated business (which would just be reported on your personal tax return and taxed based on your “marginal personal tax bracket”).
In a corporation, the first $500k of income earned is taxed at the small business tax rate of only 12.5%, so this is obviously one of the main advantages now available to real estate agents.
How does it work for you?
Let’s compare this with personal tax rates: 20% on income up to $50k, 30% up to $100k, 40% up to $150k, and further increased to 50% on income over $150k. You can clearly see the potential for reducing the amount of tax owing by using a corporation to filter your income through. Plus, certain expenses such as meals, rent, auto expenses, etc. can possibly be considered corporate expenses and used as deductions within the corporation to reduce net income.
Paying yourself a salary from your corporation can be done through a variety of different ways, but we usually use “employment income” on a T4, or as a “dividend” on a T5 as a method to extract money from a corporation (FYI, you can pay yourself $45,000 as a dividend without paying any personal taxes!). Once this money is issued to the taxpayer, it is then taxed based on their personal tax rate.
PREC considerations
Under the new legislature, real estate agents are the only candidates able to set up professional corporations. The main limitations with a professional corporation are that all income earned by the corporation must be earned through that particular profession, and that all members of the corporation must work in that profession. The other limitation is that there is no liability protection, which is normally an advantage of non-professional incorporations.
There are other factors to consider when making the decision of whether or not to incorporate. One example is the ability to sell part of or all of your corporation via shares and being able to shelter the money you receive as a capital gain. Another factor is that a corporation requires more time consuming and costly maintenance when compared with an unincorporated business.
Is PREC for you?
Incorporating makes the most sense for real estate agents who are subject to higher personal tax rates and who do not need most of their money for personal use. Overall, the decision is very dependent on your personal situation. Here is a quick summary of the major benefits for incorporating real estate earnings:
- Reduction of overall taxes payable
- The ability to defer taxes
- Funding non-deductible expenses
- Access to the lifetime capital gains exemption
Another significant benefit is to use your corporation as a funding vehicle for your retirement. A corporation is a much better way to save for your future than a traditional RRSP. In fact, a traditional RRSP may very well be the worst method of saving for your future.
As mentioned, the decision to incorporate or not depends on a number of factors, one being your personal “marginal personal tax bracket” which is the tax you would pay on the next dollar of income.
See for yourself
As an exercise of interest, go to your 2019 personal tax return and divide your Total Taxes Payable (line 43500) by your Total Taxable Income (line 26000). Although this is not your “marginal personal tax bracket” this is your “combined tax payable rate”. If that number is greater than 12.5%, you will definitely save money by incorporating your real estate earnings. The bigger the gap between your “combined tax payable rate” and 12.5%, the more taxes you will save.
I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.
Until the next time,
Gerry J. Hogenhout, CPA, CGA, CFP, AMP
Founding Principle, Canadian Investment Services
Get in touch
For further advice on whether incorporation could be advantageous for you, please visit our website www.canadianinvestmentservice.com and book a free consultation today.