Attention Ontario Realtors: You Can FINALLY Incorporate…and Here’s How!
By: Aaron Grinhaus and Alex Di Giovanni
After a years-long lobbying effort, Ontario Realtors are FINALLY allowed to reap the tax and liability protection benefits of using a Personal Real Estate Corporation (PREC). On October 1, 2020, new regulations under Ontario’s Trust in Real Estate Services Act came into effect which gave Realtors the ability to incorporate.
As long as certain conditions have been met, Realtors can finally run their commissions through a corporation as opposed to taking all income at the high personal marginal tax rates.
A PREC offers tremendous tax advantages to Realtors in the form of deferrals, access to the Lifetime Capital Gains Exemption and creating a potential for income splitting. With the potential of accessing the Small Business Deduction which on average imputes less than 13% tax on the first $500,000 of active business income for a Qualifying Small Business Corporation (QSBC), Realtors can achieve massive savings in comparison to if they were taxed on their income at an individual level, which could be close to 54%. It also gives Realtors access to the Lifetime Capital Gains Exemption which allows you to shelter more than $400,000 in tax on the disposition of the corporation’s shares.
Since family members can own non-voting shares of a PREC, an opportunity to split a Realtor’s income through the payment of dividends as well as salaries could also be available. The potential for income splitting is highly dependent on each individual’s circumstances, and to avoid the application of the Tax on Split Income (TOSI) rules, it is recommended that you seek professional advice to determine whether this option is right for you. Splitting income can result in massive tax savings; just consider that, given our graduating tax rate system, two people making $50,000 per year pay less tax than one person making $100,000 per year.
Having a corporation as your business entity, as opposed to operating as an individual sole proprietor, also protects you and your personal assets from commercial liability. Any expenses and contractual obligations, including but not limited to leases you sign for office space, employees you hire, expenses you incur, supplies you purchase, and bank loans, could all be covered under the protection of the corporation. This means that Realtors who create a PREC can now protect themselves from personal liability for all things not covered by the mandatory Real Estate Council of Ontario (RECO) liability insurance.
The regulations do have specific requirements that, especially given the novel nature of the PREC, can be tricky to comply with. For example, the incorporating Realtor must be the sole controlling person behind the corporation, which means that the share structure, officer and director appointments must be registered in such a way that it complies with the regulations and the law. You must also obtain additional documentation, such as brokerage consents, in order to evidence the intentions and compliance of the parties.
In summary, the benefits of a PREC are the following:
- Access to a substantially more preferable tax rate, which allows Realtors to build up savings inside the corporation rather than pay it in tax
- Access to the Lifetime Capital Gains Exemption
- More flexibility in the use of funds gained from commissions
- Broader personal protection from commercial and other types of liability
The lawyers at Grinhaus Law Firm have extensive experience in setting up professional corporations and can help you set up your PREC for a flat fee with our client-focused full service. For more information on this topic, call or email us any time for a free consultation.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT WITH A LICENSED PROFESSIONAL.