With the passing of Bill 145, real estate agents in Ontario can now join doctors, accountants, and lawyers in the ability to form a private corporation. The Act came into force on October 1st, 2020, permitting real estate agents and brokers to incorporate through a Personal Real Estate Corporation (PREC). This opens doors for real estate professionals to access a wide range of tax planning opportunities.
For those who are considering this opportunity but still remain undecided, there are many factors that will affect your decision to incorporate, for instance, your expected profits, family situation, business, investment, and retirement plans. Therefore, it is important to discuss your circumstances with your accountant or financial advisor to determine whether it is worthwhile to incorporate. See Appendix 1 for the advantages and disadvantages of incorporation and Appendix 2 for an illustration of tax deferral through incorporation.
You should also be aware to incorporate a PREC, you must ensure the corporation first meets the necessary criteria set out in the legislation:
The PREC must be incorporated under the Ontario Business Corporation Act.
The salesperson must hold all the voting shares of the corporation and be the only director and officer of the PREC, making the salesperson the controlling shareholder.
Any non-voting shares must be held by the family members of the controlling shareholder or the controlling shareholder of the corporation.
The PREC cannot carry on the business of trading in real estate other than proving the services of its controlling shareholder. The PREC cannot carry on business as a brokerage or hold any money or property of a client in connection with trading in real estate either.
For a detailed list of criteria and conditions of PREC, please see Appendix 3 or visit:
Once you understand all the criteria and conditions and decide to move forward to form a PREC, it would be in your best interest to enlist the help of your legal and accounting teams to guide you through the process of incorporation, as the potential negative ramifications are significant if the corporation is not set up properly. Your legal and accounting teams can tailor your financial and business needs and ensure all the legal, tax, and valuation documents are filed correctly.
Reference:
Appendix 1 – The Decision to Incorporate
Tax Considerations
Incorporation: Advantages
Tax Reduction – If time wisely, the combined corporate and personal taxes could be less than the personal taxes paid when business income is taxed at a personal level based on a marginal tax system (tax rate increases as taxable income increases).
Tax Deferral – The small business corporate tax rate is only at 12.2%, as compared to the personal marginal tax rate at 53.5%. Incorporating your business provides a substantial opportunity for tax deferral and wealth accumulation.
Tax saving through Income Splitting – Subject to tax on split income (TOSI) rules, if a family situation suits, incorporating your business allows you to shift income from a person earning higher income to a person earning lower or no income, allowing substantial income tax saving.
Access to Lifetime Capital Gains Exemption (LCGE) – The LCGE ($883,384 in 2020) allows a significant deduction of the capital gain on the disposition of shares of a qualifying small business corporation when there is an opportunity to sell its shares.
Flexibility on Remuneration – Incorporating your business gives you the access to different types of payment options (salaries, dividends, and bonuses) and the ability to select the timing of payment.
Incorporation: Disadvantages
Incorporation Costs – Incorporating your business would incur additional legal and accounting fees. Incorporating an existing business may require a costly asset rollover process that may include goodwill valuation (Section 85 of the ITA).
Limited Loss Deductions – A sole proprietor can deduct the business loss incurred against other personal income. However, after incorporation, the business loss from the corporation can only be applied to the income of the corporation.
Additional Administrative Burdens – These may include:
- Compiling financial statements: Corporations need to produce annual financial statements and applicable schedules for corporate tax returns.
- Preparing corporate tax (T2): Corporations must file corporate tax no later than 6 months after the end of each tax year, even they may not have income to report or does not have any tax owing.
- Adhering to corporate tax payment schedule: The balance of tax is typically paid two or three months after the end of the tax year. In addition, corporations may have to pay taxes in instalments.
- Maintaining payroll taxes compliance: Corporation is required to withhold CPP and EI from their employees and remit the payroll deductions to the CRA. In addition, corporations are responsible of filing T4 if applicable.
Less Deduction on Charitable Donations: Charitable donations made through a corporation are treated as a deduction from corporation income. The amount of tax saving is typically not as lucrative as if the charitable donations are made personally in which a non-refundable tax credit reduces personal income taxes owing.
Complex Corporate Dissolution Process – Related legal and accounting costs can be costly, especially in winding up process.
Appendix 2 – Advantage of Tax Deferral
An Illustration
Advantage of Tax Deferral - An Illustration
The net tax savings amount to $24,979, being the personal tax of $71,035 if earned personally minus the combined corporate and personal taxes of $35,228 for year 1 and $10,828 for year 2. This is in addition to CPP cost savings of $5,796 ($2,898 multiplied by 2).
Appendix 3 – Personal Real Estate Corporation
(PREC) Checklist
Criteria - Corporate Attributes
Must be incorporated under the Ontario Business Corporations Act
The corporation has one single controlling shareholder (a broker or salesperson who owns ALL the equity shares, which are the voting shares)
The controlling shareholder is the president and sole director and officer of the corporation
The controlling shareholder is registered as a broker or salesperson
Any non-equity shares (non-voting) must be owned directly or indirectly by the family members (spouse, children, parents, trust for a minor child) of the controlling shareholder or by the controlling shareholder
There is no written agreement or other arrangements that restrict or transfers the powers of the sole director and officer to manage or supervise the management of the business and affairs of the corporation
PREC Conditions
The PREC does not carry on the business of trading in real estate other than providing the services of its controlling shareholder to the brokerage that employs that individual
The controlling shareholder is employed by a brokerage to trade in real estate
The PREC, its controlling shareholder, and others are prohibited from representing to the public that the PREC trades in real estate
The PREC does not carry on business as a brokerage
The PREC only receives remuneration for trading in real estate from the brokerage employing the controlling individual and the controlling individual only receives remuneration for trading in real estate from the PREC or their employing brokerage
The PREC does not, on behalf of the brokerage, directly or indirectly hold any money or other property of a person in connection with trading in real estate
Agreement – Brokerage, PREC, and Controlling Shareholder
There must be a written agreement between the PREC, the controlling shareholder, and the brokerage governing the relationship between the brokerage and the corporation and its controlling shareholder. Under the agreement, the PREC agrees:
Not to hinder or obstruct the brokerage or its broker of record in their performance of duties under the legislation
Not to hinder or obstruct the controlling shareholder in the performance of the controlling shareholder’s duties under the legislation
To provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of record to comply with their duties under the legislation and to enable the brokerage and its broker of record to ensure that the controlling shareholder is complying with the controlling shareholder’s duties under the legislation
To provide whatever assistance may be reasonably necessary to enable the brokerage to determine whether the conditions are met
Brokerage Obligations
Before any remuneration is paid to the PREC, the brokerage must satisfy itself that the corporation meets the requirements to be a PREC
The registrant must enter into an agreement with the PREC and the brokerage regarding the use of the PREC and payment of remuneration to the PREC
Registrant (Controlling Shareholder) Obligations
The registrant must be employed by the brokerage
In establishing the PREC, the registrant must ensure that the criteria and conditions identified are met
The registrant must enter into an agreement with the PREC and the brokerage regarding the use of the PREC and payment of remuneration to the PREC
The registrant must notify the registrar (RECO) of the legal name of the PREC and the address for service of the PREC before the PREC receives any remuneration from a brokerage
The PREC cannot pay the registrant an amount for remuneration that is greater than the amount of the remuneration received from the brokerage
The registrant must notify the registrar (RECO) in writing of any change in circumstances that would affect the PREC’s eligibility for the exemption from registration or any change to the information provided to the registrar (RECO) about the PREC, within five days after the change takes place
The registrant must ensure that the PREC does not engage in any activity that would otherwise require registration
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