Incorporating Real Estate Business in Canada

Incorporating Real Estate Business in Canada

Real estate agents and brokers have historically been prohibited from carrying on their business through a corporation. But now Several provinces, including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, and, most recently, Ontario, allow PRECs. 

Under the proposed regulations, individuals can incorporate and register their real estate service business to form a “personal real estate corporation” (PREC).

What is a Personal Real Estate Corporation?

A Personal Real Estate Corporation (PREC) is a corporation belonging to a single real estate salesperson, associate broker, or managing broker for the purpose of benefiting from the income and tax planning potential of a corporation. Personal real estate corporations may only provide real estate or ancillary services (real estate transaction-related services) as their main form of business. The real estate salesperson owning the PREC license must be the sole voting shareholder, as well as the sole director/officer of their personal real estate corporation.

A PREC is a legal corporation that allows you to receive income and pay the expenses of your real estate business. A PREC is required to submit a separate income tax return to the CRA as it is a separate legal entity apart from the owners. Forming a personal real estate corporation in Canada may have certain benefits associated with it. If you want to establish a personal real estate corporation (PREC) in Canada, you alone will be responsible for all key decisions of your corporation. A PREC can own property, insurance policies, and make investments. The corporation may also be required to open up different program accounts of the CRA.

A PREC should not be confused with a corporation set up by a real estate investor to own real estate. A personal real estate corporation is only for a real estate agent.

The new rules allowing real estate agents to incorporate gives them the opportunity to reap the benefits of owning a corporation, including a lower tax rate, the opportunity for tax deferral and income splitting, and deductions. 

Requirements of PRECs

While they have similar benefits to other corporations, a PREC is subject to a few additional requirements.

  1. The corporation is incorporated or continued under the Business Corporations Act.
  2. All of the equity shares of the corporation are legally and beneficially owned, directly or indirectly, by the controlling shareholder.
  3. The sole director of the corporation is the controlling shareholder.
  4. The president, being the sole officer of the corporation, is the controlling shareholder.
  5. There is no written provision by agreement or otherwise or arrangement that restricts or transfers in whole or in part the powers of the sole director to manage or supervise the management of the business and affairs of the corporation.
  6. Each non-equity share of the corporation is
  • legally and beneficially owned, directly or indirectly, by the controlling shareholder,
  • legally and beneficially owned, directly or indirectly, by a family member of the controlling shareholder, or
  • owned legally by one or more individuals, as trustees, in trust for one or more children of the controlling shareholder who are minors, as beneficiaries.

Advantages and disadvantages of incorporating

Following are some accounting and tax considerations to discuss with your tax accountant.

Advantages of PRECs

Tax savings

Sole proprietors are taxed at a higher rate than corporations because they are taxed as individuals. When a real estate agent opens a PREC, they can take advantage of lower corporate tax rates. 

The corporate tax rate in Ontario is 11.5 percent, which is lower than the personal tax rate for individuals who make over $150,000. You also have to factor in federal taxation on top of that, which is 15 percent for corporations. The federal tax starts at 15 percent for individuals and goes up to 33 percent. 

Typically, real estate agents pay the personal income tax rate on all income earned. If you are a high earner, this can mean a significant chunk of your income goes towards the government. 

Income splitting

With a PREC, so long as all the voting shares remain with the real estate agent that owns it, family members can be named as share members with non-equity, non-voting shares. This means that dividends can be paid to those family members.

Income splitting isn’t available to all real estate agents under the PRECs. This is because of the updated Tax on Split Income (TOSI) exception that sees dividends paid to family members as split income and makes it taxable at the top rate. This effectively means income splitting is not the best benefit of a PREC.

However, there are two exceptions to the TOSI rules that could make income splitting a benefit to incorporating a real estate practice in Ontario. The exceptions to TOSI rules are:

  • If a real estate agent is over the age of 65 years (regardless of the age of their spouse)
  • If the spouse works over 20 hours per week at the business over the course of a year 

If you and/or your spouse fall under one of these two exemptions, income splitting could be a major advantage of a PREC.

Tax deferral

Tax deferrals are not the same as tax savings, but they could save you money in the long run, depending on what you do with your excess revenue. PRECs gives real estate agents the ability to defer some income, which would then likely qualify at a lower rate of tax.

This can save you money at tax time, but you will eventually have to pay personal tax on it when you start withdrawing from your accumulated corporate savings. This is because after-tax profits are still taxed when they are paid out in dividends. 

That said, if a realtor can accumulate savings in their PREC, those savings could be used to create additional cash flow. The savings could possibly be invested in stocks, GICs, EFTs, bonds, and mutual funds, or they could go full circle and be invested in real estate.

It should be noted that if you spend all the money you earn annually in that same year, you will likely not reap the benefits of the tax deferral advantage.

Tax deductions

Sole proprietors already benefit from business-related tax deductions, and many of those are the same that corporations benefit from. However, there are two notable exceptions when it comes to tax deductions from having a PREC:

  1. Health Spending Account (HSA): With an HSA, a business owner can be reimbursed for personally incurred medical expenses without those business withdrawals being considered taxable income.
  2. Corporate paid retirement counseling: Though the purchase of services like financial counseling or tax preparation is usually considered taxable benefits, the exception to the rule is counseling that relates to retirement. With a PREC, real estate agents might be able to fund the service without paying taxes on it.

Disadvantages of PRECs

There are two significant disadvantages to incorporating your real estate business, and both are related to the cost. 

Whereas sole proprietorships are inexpensive and easy to set up, there is a little more paperwork and a higher price tag involved with incorporation. Likewise, when operating a PREC, you will probably spend more money annually on bookkeeping costs and accounting fees for the corporate filings.  

Most times, especially when it comes to higher earners, the advantages outweigh the disadvantages. However, as mentioned earlier, if you’re a real estate agent who isn’t running a particularly high-earning business, these costs might not be worth incurring.

Determine if incorporation is right for you

Despite these benefits, a PREC won’t be right for everyone. At a high level, incorporation likely makes sense if you’re an agent who: 

  • Has income in excess of personal spending requirements 
  • Wants to take advantage of income tax deferral opportunities 
  • Wants to invest excess cash in income-producing assets 
  • May be able to split income with family members

However, just because you can incorporate doesn’t necessarily mean you should. The potential costs and benefits of incorporating will vary depending on your business's unique needs, risks, and cash flow levels.

Incorporation with a PREC has benefits and drawbacks, so it depends on how a real estate agent runs their business, how much money they make, and how they want to go about handling and reporting that money. 

While PRECs have benefits related to tax deferral, income splitting (if you meet one of the exceptions), tax deductions, and give you access to the corporate tax rate, they also cost more money to start and maintain.  

Many experts say that the PREC model mostly benefits real estate agents who are in a higher tax bracket (especially if you’re claiming $100,000 or more where your personal tax rate is over 40 percent). Not only does the PREC give you access to the decreased tax rate, but also tax referral capabilities—both of which can help you accumulate wealth faster.  

Making the leap from a sole proprietorship to a PREC will take extra work, but it might just be the thing that takes your real estate business to the next level.

Does incorporating make sense for you? How Can We Help?

Even after considering the factors above, you may still be unsure whether incorporating is the right move for your real estate business right now. Whether you’re seriously considering incorporating or would simply like to know more and weigh your options now’s a great time to reach out to professional accountants at Filing Taxes for a more detailed cost/benefit analysis.

To help assess your situation, we’ll evaluate questions like: 

Do you spend all the income you earn from your business?

  • Are you contributing money towards your retirement?
  • Do you have business debts? Are you the personal guarantor on the business debts?
  • Can you sell your business? Can you use your Lifetime Capital Gains Exemption if you do?
  • Is your business exposed to legal liability? Are you personally at risk?
  • How do you plan on funding the capital to grow your business?

Together, we can ensure you are set up properly and tax-efficiently — both to fit your current needs and to provide the best outcome possible in the eventual case of your retirement or business exit. Our professional team of accountants has helped many entrepreneurs hit the ground running quickly—and affordably. feel free to reach out to Filing Taxes at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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