Recent regulation permitting the creation of Personal Real Estate Corporations (PRECs) has come into effect, allowing realtors to incorporate much like doctors, lawyers and accountants have been able to for years. In short, if you make enough income to justify putting one into place, utilizing a corporate structure offers many tax saving and planning advantages that you haven’t had prior.
The most significant advantage is likely being able to achieve tax deferrals – for a real estate agent in Ontario, the highest marginal tax rate on earnings in excess of $220,000 is ~53.5%. But earning income through a PREC allows the corporation to pay tax on the income earned inside the corporation at ~12.5% combined tax rate in Ontario (on the first $500k at least). This would allow excess income to be invested inside the company, with personal taxes only applying when you draw out the funds as either a salary or dividends. So a much larger capital base can be used to invest and grow wealth within the corporation and enjoy the lowest tax rate for as long as the capital and income remain there.
Many expenses can also be paid out of the corporation, allowing for faster growth of your business with the increased funds. Also, expenses such as life insurance premiums can be paid out of the corp, as well as business expenses that are only partially deductible outside of a corp (like meal and entertainment expenses). These are very powerful savings tools alone if you can take advantage of a corp.
Income splitting can often be achieved with incorporating – meaning paying a spouse or child from the corporation. This requires family members to be involved with the business in some capacity, but if they are, you can pay them out of the corp as well. Their tax rates are presumably lower than yours, so can get taxed at their personal (lower) rate.
And as a Realtor, you can also include other businesses in your corporation, something not available to most other professionally incorporated folks. This can include property management services, investment/rental property income, or mortgage broker activities.
If you ever sell your business, you can take advantage of the Lifetime Capital Gains Exemption in your private corp. This allows a person to deduct a set amount from the gain on the sale of the business – currently that amount is ~$883k. That’s a big chunk of tax-shelter if and when you sell the business.
Finally, there are some significantly value-enhancing strategies that incorporating can create for your retirement. Individual Pension Plans (IPP) and Retirement Compensation Arrangements (RCA) allow one to save more than traditional plans like RRSPs on a tax-advantaged basis. I have utilized these for selected clients, and if you have the right circumstances, are often a no-brainer to put into place as well.
In order to incorporate as a Realtor, you generally want to have an income in excess of what you need for your yearly spending requirements, but if that’s the case, you should certainly be investigating implementing a PREC. There are additional costs in incorporating (legal and accounting fees, both at set up and ongoing), but is something worth seriously considering if you’re a successful Realtor. This is something we can help with, and coordinate you with best in class tax and legal advice to assess this opportunity.
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