Is creating a Professional Real Estate Corporation (PREC) right for you?
Ontario recently joined several other provinces by allowing the establishment of personal real estate corporations (PREC).
A personal real estate corporation, or PREC, allows a real estate agent to earn their business income through a corporation. Several provinces allow PRECs including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia and now Ontario.
Before deciding if a PREC is right for you, there are a number of factors to examine. Below is a list of questions� to consider:
- Are you earning more money than what you need to meet your daily living expenses?
- Do you want to save more money for retirement?
- Could you benefit from distributing business income to your family members?
- Are you considering passing your business on to a family member who is or will be a real estate salesperson or broker registered with RECO?
- Are you considering selling your business to a real estate salesperson or broker registered with RECO?
- Are you incurring significant business expenses that are either not deductible, such as life insurance premiums, or only partially deductible, such as meal and entertainment expenses?
- Where are you in your professional journey? Are you just starting your real estate career or are you heading towards retirement?
There are several benefits to forming a Professional Real Estate Corporation. Listed below are some of them:
One of the primary benefits to incorporation for a realtor is the ability to defer income tax. The tax rate on small business income up to $500,000 in Ontario is 12.2% and in Alberta, 11%. Profit left in a PREC generally qualifies for this low rate of tax. By comparison, personally earned income at $50,000 in Ontario is taxed at 29.65%; at $100,000, it’s 43.41%; $150,000 at 44.97%; $200,000 at 48.19%; and over $220,000 at 53.53%.
If you are a high-income Ontario realtor, incorporation could result in tax deferral of up to 41.33%!⁴
With a PREC you have a structure for potentially splitting the business income to achieve certain tax benefits by paying dividends to members of your family (18 years of age or older) actively involved in the business. Paying dividends can provide you with flexibility in how much income you want to distribute to lower the combined tax burden within your family and PREC. The rules surrounding income splitting are complex and advice from your tax advisor is crucial before implementing any income splitting strategies.
Flexibility of Remuneration
Incorporating can give you access to different types of payment options, including salary, dividends, and bonuses. It is important to talk to your tax advisor as to what is right for you.
Lifetime Capital Gains Exemption
You may enjoy a significant tax break on the capital gains you realize on the disposition of certain private corporation shares. Each individual resident in Canada may claim a Lifetime Capital Gain Exemption (LCGE) to shelter capital gains on the disposition of qualified small business corporation (QSBC) shares. As suggested previously, you should consult with your tax advisor to ensure that you structure your business arrangements and the PREC appropriately to take advantage of this possibility, if it is important to you.
Non-deductible and Partially Deductible Expenses
You may also enjoy a small tax reduction in relation to certain business-related expenses you incur that are not fully deductible. This is because having such expenses incurred by the PREC means that the applicable Ontario tax rate is 12.2 per cent, whereas paying such expenses individually means that the applicable tax rate is 53.53 per cent.
There are many opportunities to minimize taxes and maximize wealth creation within the corporate structure. Similar to needing a financial plan for your personal life, it is important to utilize planning tools and wealth strategies for your business in order to attain maximum benefits from all your hard work.
Each stage of your business life has its own focus and associated needs. We’re here to help.
Before deciding if a PREC is right for you, it is important to obtain advice from your lawyer, tax advisor and a financial advisor who is experienced in working with Professional Corporations. At Podium Prosperity Group, we have assisted many individuals to form Professional Corporations and to implement financial strategies to protect and grow their personal wealth.
Written by Susan Walker (Stonebrooke Private Wealth Management) – reproduced with permission
�provided by OREA
�Federal rate of 9% plus 3.2% Ontario rate equals 12.2%
�Federal rate of 9% plus 2% Alberta rate equals 11%
⁴based on the top personal rate of 53.53% less the corporate small business rate of 12.2%
This article is provided for information purposes only. Although the content is believed to be reliable when posted, Podium Prosperity Group cannot guarantee this information is current, accurate or complete and does not assume any liability. The information is not intended to provide any insurance, financial, legal, accounting or taxation advice and should not under any circumstances be relied upon without consultation about your specific situation. The information is subject to modification and updating from time to time without notice.