Realtors: Should I incorporate ?
Since October of 2020 when the Trust in Real Estate Act first allowed realtors to receive commissions through Personal Real Estate Corporations (PREC), the allure of lower corporate rates has many wondering about incorporating. The big question on everyone’s mind is: At what income level does it make sense to start a PREC?
Unfortunately, there is no magic number — as with any tax-related question, the answer prior to analysis is always “it depends”.
The main question to ask yourself is: Am I earning more than I am spending ?
If you need all your earnings for living expenses, then you will simply be passing the income through your PREC to yourself. This means there is little or no benefit to the PREC because the income will all be taxed in your hands at your marginal tax rate, and now you are left with the additional burden and expense of having to file both a corporate and a personal tax return without gaining anything in tax deferral.
The bottom line is that you need to evaluate your personal spending relative to your income to decide whether or not it will be worth having your commission income paid to a PREC.
Part of this decision should involve consideration of whether or not you are already taking advantage of tax planning opportunities in your life as it is right now. Speak with a tax professional such as Stewart/Dunklee to consider whether or not you are making the most of the opportunities already available under tax law to reduce your annual tax liability.
Remember that a PREC is not a passive instrument — a corporation is an entity that needs to be maintained through proper record keeping and filing, and there are many more low-maintenance ways you can plan your affairs to reduce annual taxes on your business and personal income.
If you consider all of this and believe that a PREC is the right option for your real estate business, then you will gain considerable control over the timing of personal income. This is the primary benefit of being paid to a corporation by your brokerage — the small business combined tax rate in Ontario is quite a bit lower than personal tax rates, so you can defer quite a bit of taxation by using a corporation if you set up your life correctly. This can help you to achieve your savings and investment goals, and also create a cushion against future lean years or times when you would like to take time off from your business.
Benefits of incorporation
- Timing of Personal Income — With a PREC you can control the timing and amounts of income allocated to you personally. This can help you to achieve your savings and investment goals, and also create a cushion against future lean years or times when you would like to take time off from your business.
- Income Splitting — Although the CRA imposes some limitations on these activities, your spouse and other designated family members can be shareholders and/or employees of your PREC and receive dividends or salary to keep both of your personal incomes in a lower tax bracket.
- Tax Deferral — Tax rates on income earned by a PREC are significantly lower than the rates charged on the same income in the hands of an individual realtor — particularly on the first $500K of annual income which is currently taxed at 12.2% in Ontario.
- Inter-corporate Dividends — If you have multiple streams of income or holding companies that are incorporated, you can pay dividends from your PREC to your other companies and therefore use your real estate income to fund other projects. This means that money which would otherwise be used to pay taxes can be invested in other ventures.
Challenges of Incorporation
- Two-Entity Thinking — You are already used to tracking your expenses for business purposes, but once you incorporate you will need to ensure that you think of your PREC as the separate “person” that it is, and make arrangements to separate banking and credit cards completely from those you use in your personal affairs
- Additional Filing Requirements — Once you start a PREC, you will need to begin filing annual corporate (T2) tax returns in addition to your personal return. The tax return for a corporation is far more detailed than a personal return and requires specialized understanding and professional preparation which is quite a bit more costly than a personal return
- Higher Standard of Bookkeeping — All of us are expected to keep business records in case the CRA requests verification of expenses. But corporations are required to prepare statements backed up by a proper bookkeeping system which will often require the assistance of a professional
Whether or not a PREC is the right choice for you depends largely on your personal living expenses and financial goals in relation to your real estate income level. Be honest with yourself and be sure to reach out to professionals to ensure you are making the most of any tax planning options available to you, and whether or not a PREC could be advantageous for your real estate business.
At Stewart/Dunklee we can provide a free consultation and analysis of your personal circumstances and help you with this decision. We provide “end-to-end” bookkeeping and tax service throughout the year to keep your PREC compliant and make sure your books and filings are accurate and up to date.
We specialize in offering accounting and consulting services to real estate professionals and brokerages. Whether or not you choose to incorporate, Stewart/Dunklee can help to make administration of your real estate business easier so you can focus on what you do best.
This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article should not be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Stewart/Dunklee to discuss these matters in the context of your particular circumstances. Stewart/Dunklee, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.