Benefits of Incorporation (PREC) for Realtors in Ontario
Thanks to the passing of Bill 145, Trust in Real Estate Services Act, 2020, realtors in Ontario may now incorporate and earn income through a Personal Real Estate Corporation (PREC). This allows realtors who choose to incorporate, to defer personal income tax and pay a corporate income tax rate, allowing them to retain more of their income which can then be reinvested back into their company or saved inside the corporation so that they can enjoy an earlier or more comfortable retirement.
Benefits of Setting up a Personal Real Estate Corporation
Realtors who set up a PREC enjoy a number of benefits over those who choose to remain sole proprietors. These benefits include:
Better Tax Rates
Some realtors who are very high-income earners (with incomes above $220,000) pay tax rates of 53.53%. When they incorporate, however, they can pay the Ontario small business tax rate of 13.5% on the first $500,000 of their income, and 26.5% on income over and above the $500,000 mark.
Tax Deferral Opportunities
Another benefit for realtors who incorporate is that they may defer some of their personal taxes by leaving them within the corporation. If a realtor is earning more money than they need to live on, they may choose to leave a portion of that income within the corporation. This means that they will not be required to pay taxes personally on that income until they choose to withdraw it.
As realtors’ incomes tend to fluctuate from year to year, they may choose to withdraw the money in a lower sales year (when they may not be in such a high-income tax bracket) or during retirement when their income is expected to be lower. By withdrawing this cash when they are in a lower income bracket, it means that they will pay less in taxes overall.
Incorporated realtors can experience further tax benefits by income splitting which means paying a family member a fair wage to perform certain tasks within the corporation. For example, if a realtor’s spouse or child is in a lower income bracket and they perform administrative duties for the company, they are eligible to be paid a salary by the realtor. This means that the family as a whole will pay less in taxes.
Should You Incorporate Your Real Estate Business?
Although there are many benefits for realtors in Ontario who incorporate, it is not for everyone. Realtors who incorporate generally have to pay higher accounting fees because of the added complexity of their business and must follow stricter regulations with CRA.
For those realtors, however, who have very high income and who do not require all of that income for personal use in a given year, the benefits of incorporation may well outweigh the costs and red tape associated with it.
Contact Levy Zavet Today
If you are a realtor and are considering incorporating, we can help. Contact us today to speak with a member of our legal team.