As many of our clients already know, regulated professionals, such as doctors, dentists, lawyers and accountants (and other professionals) have been allowed to incorporate and operate their practices through professional corporations for the last fifteen years, allowing them the benefit of taking control of their annual income through incorporation and most importantly reducing their tax burden substantially—see below. Soon, realtors in Ontario will also be able to set up and benefit from personal real estate corporations (PREC) resulting from the efforts of lobbying by the Toronto Real Estate Board.
Bill 145, Trust in Real Estate Services Act, 2019, as of yesterday , is currently being considered by the Standing Committee on General Government, following which it will be called back for a third and final reading, and then royal assent, at which point the bill will be made law. One of the main goals of this legislation is to create a strong business environment by allowing realtors to incorporate.
What does this mean for Realtors?
Operating out of a PREC will not limit the professional liability or affect the professional obligations of the realtor, and the PREC will be subject to all of the same professional ethical obligations outlined in the Real Estate and Business Brokers Act. However, the following benefits will apply if this legislation is passed:
Tax Benefits – Corporate Tax Rates and Deferral
As the top marginal personal income tax rate in Ontario on income over $220,000.00 tops out at around 53.53%, generating income through a PREC can allow realtors to enjoy the corporate tax rate of 12.5% (as of 2019) on the first $500,000 of active income, with any excess income taxed at the general corporate rate of 26.5%. Put simply, a real estate agent operating in the right circumstances and generating an income through a PREC may be able to reduce their tax burden by up to 41%! Note that this is just a deferral of tax payable which you will only enjoy for that portion of your income you are able to leave in the PREC. Any income taken out of the PREC will result in the higher personal rate tax. Like other professionals who have been able to incorporate, this function of the PREC will allow realtors to control their yearly personal income and applicable tax rate and provide realtors with a convenient vehicle for retirement planning.
Possible Capital Gains Exemption
In specific circumstances, the shares of a PREC earning active business income may be eligible for a capital gains exemption, saving tax on any sale of the shares of the PREC or death of the real estate agent shareholder in question. On a sale of the shares of a PREC, each Canadian resident shareholder who sells qualifying shares will enjoy the benefit of the capital gains exemption of approximately $866,912 for 2019—put simply, if you sell the shares of your PREC, the first $866,912 in capital gains will be tax free, if set up properly.
Costs of incorporation and other considerations
The prospect of incorporation also comes with additional compliance requirements and costs, which include set-up costs and annual maintenance costs for updating corporate minute-books and annual corporate minutes, as well as additional tax considerations for filing your corporate tax returns. If Bill 145 passes into law, the introduction of PRECs will allow Ontario realtors to enjoy the same benefits that other regulated professionals have been reaping for over a decade. However, incorporation may not be recommended in every situation, as each realtor’s financial considerations must be reviewed carefully with a professional, and the application process for licensing may turn out to be quite involved.
Real estate agents who are considering incorporation following the passing of Bill 145 should seek professional legal advice. Kutner Law LLP can provide an experienced hand to guide realtors in setting up their PREC and structuring the corporation to allow realtors to take full advantage of the tax-planning benefits of incorporation. We would be pleased to provide assistance to any individuals looking to establish a PREC following the passing of Bill 145.
This blog post is for informational purposes only and should not be construed as legal advice.