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In our recent blog, we took a look at some of the opportunities now available to Ontario realtors through Bill 145. Essentially, the bill allows real estate agents to avail themselves of several modern business practices that they previously could not access. The main opportunity lies in incorporating as a Personal Real Estate Corporation, or PRECs.
In incorporating, realtors have the advantage of corporate tax rates, income splitting, and income tax deferral. Let’s take a quick look at how this can play out:
Taxation and deferral
Within Ontario, income over $220,000 can be taxed at a top marginal personal income tax rate of 53.53%. By contrast, corporations are taxed at 12.5% on the first $500k of annual Canadian active business income. Any annual business income above $500k is taxed at 26.5%.
Thus, in incorporating as a PREC, realtors can potentially reduce their immediate taxes by up to 41%. That said, the PRECs tax savings represent a tax deferral. This means that the after-tax profits can be left in the PREC, but once the money is withdrawn personally, personal income tax will have to be paid at that time.
Income splitting
Though the regulations around income splitting became more stringent back in 2017, it is still possible for family members to split income when they are actively involved in the business together. This can be accomplished by paying family members dividends. Bill 145 enables realtors to take advantage of this valuable perk.
Bill 145 regulations
On October 1, the government announced the first set of regulations that will shape how realtors are incorporated and paid through their PREC. Highlights include:
Qualifications
In order to qualify as a PREC, realtors must meet the following conditions:
- Sole director acts as a controlling shareholder
- Must incorporate under the Business Corporations Act
- Controlling shareholder must be an employee of a brokerage and certified to trade in real estate
- The PREC is for one specific controlling shareholder; other businesses and investments must be managed through separate entities
- The relationship between the controller, the brokerage, and the PREC must be laid out in a formal agreement
- The PREC cannot be a brokerage, and can only receive remuneration through the brokerage it is employed by
- PRECs cannot hold property or money belonging to clients
Shareholding
Shares of a PREC must be organized in the following manner:
- The controlling shareholder must own all the equity shares in the corporation
- Non-equity shares of the PREC can be owned by the controlling shareholder, in addition to their spouse, parent, or non-minor child, or a trustee for the controlling shareholder’s minor children
Is a PREC best for your business?
Like any tax strategy, PRECs aren’t a “one-size-fits-all” solution. The efficacy of this structure will largely depend on the specific details of your real estate business. That’s why it’s helpful to speak with a taxation professional who can provide you with the short and long-term guidance needed to create a strategy that delivers on your unique goals.
At Zeifmans, we have decades of experience working with real estate professionals in crafting taxation strategies that preserve profits and maximize wealth. Curious how the new PREC could benefit your business? Reach out to us today.
