Are you a real estate agent looking to maximize your earning potential? Have you heard about a personal real estate corporation (PREC) but are unsure if it's the right move for you? In this article, we'll explore the benefits and considerations of setting up a PREC, helping you make an informed decision.
The Basics of Personal Real Estate Corporations
A personal real estate corporation allows real estate agents, specifically in provinces like British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, and Ontario, to earn their business income through a corporation. It provides an alternative structure for real estate professionals to operate and manage their earnings.
It's important to note that a PREC is distinct from a corporation set up by a real estate investor to own properties. A personal real estate corporation is exclusively for real estate agents.
The Potential Tax Advantage
One of the primary benefits of incorporating as a realtor is the ability to defer income tax. In several provinces, there is a low tax rate on small business income up to a certain threshold (e.g., $500,000 in Ontario). By leaving profits within a PREC, realtors can take advantage of this lower tax rate and potentially defer taxes.
Compared to personal earned income, which can be subject to higher tax rates, especially for high-income earners, incorporation can result in substantial tax deferral. However, it's important to note that this is tax deferral, not permanent savings. Personal tax becomes payable when withdrawing accumulated corporate savings, typically through dividend payments.
Family Income Splitting
Realtors in Ontario have the opportunity to name family members as shareholders in their PREC. While the realtor must maintain ownership of all voting shares, non-voting shares can be issued to family members, allowing for income splitting. However, it's crucial to be aware of the Tax on Split Income (TOSI) rules that apply to Canadian private corporations. These rules may limit the income-splitting benefits by taxing dividends paid to family members at the top tax rate.
Exceptions to the TOSI rules exist for realtors who are over 65 years old or whose spouse works more than 20 hours per week in the business throughout the year.
Additional Considerations
In addition to potential tax advantages and income splitting, there are other factors to consider when deciding to set up a PREC:
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Tax Deductions: Most expenses that are tax-deductible for unincorporated realtors also apply to incorporated realtors. While a PREC may not result in additional tax deductions, there are unique exceptions, such as the ability to set up a Health Spending Account (HSA) or corporate-paid retirement counseling.
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Costs: Establishing and maintaining a PREC comes with additional costs. Incorporation expenses, including legal fees, can range from $1,000 to $3,000. Annual bookkeeping and accounting costs may also increase by $1,000 to $3,000 compared to a realtor's current expenses.
Ultimately, whether you should set up a PREC depends on your specific circumstances. Tax deferral and income splitting can be attractive benefits, but it's crucial to seek professional advice to determine how these advantages align with your personal and financial goals.
Remember, a personal real estate corporation should not be seen as a one-size-fits-all solution. It's essential to evaluate your situation, consult with tax and financial professionals, and make an informed decision.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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