Several provinces—including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, and most recently, Ontario—have started allowing real estate salespeople to earn their business income through a Personal Real Estate Corporation (PREC).
The question of whether you should set up a PREC ultimately depends on your individual situation, but there remain a few benefits of setting up a Personal Real Estate Corporation:
- Tax deferrals;
- Income splitting;
- Tax deductions;
Not to be confused with tax savings, the most beneficial aspect of setting up a PREC is the ability to defer income tax. Personal income tax in Ontario is structured in marginal tax brackets:
- $50,000 is taxed at 29.65%
- $100,000 is taxed at 43.41%
- $150,000 is taxed at 44.97%
- $200,000 is taxed at 48.19%https://youtu.be/fV3RyvRavIY’
- $220,000+ is taxed at 53.53%
In comparison, the tax rate on small business income up to $500,000 is 12.2% in Ontario, which a PREC would generally qualify for.
If you are a high income realtor in Ontario, incorporation could result in tax deferral of up to 41.33%. based on the top personal rate of 53.53% less the corporate small business rate of 12.2%. If you are unsure on how to effectively utilize your tax deferral opportunities, consider consulting a Certified Professional Accountant to discuss options and find what would work best for you.
As a realtor, if you own all the voting shares of your business, you are able to name your family members as shareholders of your Personal Real Estate Corporation. Non-voting shares can be issued as well, however, under Tax on Split Income (TOSI) rules—which have applied to all Canadian private corporations since 2018—the majority of dividends paid to family members will be considered split income and be taxable at the top tax rate, negating the benefits of income splitting.
Two primary exceptions to these punitive TOSI rules are if the realtor is over the age of 65, or if their spouse works more than 20 hours per week in the business over the course of the year.
If you are a realtor operating under a non-incorporated business model, there are a few key tax advantages of incorporation. One key example is the ability to set up a Health Spending Account (HSA). HSAs allow an incorporated business owner to be reimbursed for personally-incurred medical expenses without the withdrawals being treated as taxable income. If you are a medicinal user of marijuana, having a HSA set up under your PREC would allow you to reimburse yourself for all purchases.
To be certain if setting up a Personal Real Estate Corporation is for you, seek tax and financial advice from a Certified Professional Accountant pertaining to the potential benefits of incorporation.