The Trust in Real Estate Services Act, 2020, S.O. 2020, c. 1 – Bill 145 (“TRESA”), formerly known as the Real Estate and Business Brokers Act (2002), was passed by the Ontario legislature on February 28, 2020 and received Royal Assent on March 4, 2020. In a press release, dated October 1, 2020, the Ontario government announced the first phase of regulatory changes related to TRESA which modernize rules for registered real estate brokerages, brokers, and salespersons across the province while also addressing consumer concerns.
The first phase includes regulations that more closely align real estate brokerages and professionals with modern business practices including the ability for professionals to incorporate and be paid through Personal Real Estate Corporations (“PRECs”).
What is a Personal Real Estate Corporation?
A PREC is a form of business incorporation that allows real estate professionals to obtain the same tax and income benefits that other entrepreneurs enjoy. This is a significant opportunity for real estate agents and brokers, who have previously been denied the same tax-saving and other advantages that realtors in other provinces such as British Columbia, Quebec, Manitoba, Saskatchewan, Alberta, and Nova Scotia have all enjoyed for years.
What are the Benefits of Incorporating a PREC?
The PREC model for realtors is flexible and agents or brokers who use a PREC may be able to:
Achieve tax deferrals;
Benefit from the Lifetime Capital Gains Exemption for shares of a qualified small business corporation;
Benefit from Income splitting options; and/or
Utilize holding corporations to own and manage their other investment and business activities along with their core real estate trading activities.
Of course, incorporation does come with some up-front expenses and increased obligations such as the requirement to keep up with annual filings as well as more stringent legal regulations. Moreover, it is important that real estate agents and brokers considering incorporation plan strategically, and in advance, to ensure they do not inadvertently disentitle their PREC from one or more of the above-noted tax advantages. The guidance of a knowledgeable business lawyer can help to maximize the benefits of incorporation while limiting risk and minimizing tax burden.
Should a Real Estate Agent Incorporate? What are the Advantages and Disadvantages?
Incorporating your real estate business has its advantages and disadvantages summarized below:
Advantages of incorporation:
Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% personal taxes on entire earnings.
Tax deferral opportunities – This allows you to grow money on tax deferral basis through various investment vehicles.
Income splitting between among spouse. Of course, be aware of TOSI rules (Tax on split income)
The duties and obligations of real estate agents and brokers will apply regardless of whether real estate services are being provided by an individual or through a PREC. Realtors will not benefit from limited personal liability when operating through a PREC under TRESA as would typically apply to a shareholder in a standard corporation.
Disadvantages of incorporation are usually compliance related costs:
Incorporation charges – This could range from $1,000 to $2,500.
Higher accounting fees – You might be paying higher fee for corporate filing.
Stricter compliance – You will be required to submit T4 if you decide to withdraw money through payroll for yourself and spouse. Also, you must make remittance payment on monthly basis to stay in compliance with CRA. Check out our related blog on CRA compliance and deadlines.
Primarily for high income agents – No advantage if an agent needs all their earnings for personal use – that is, the advantages only exist for high income earning agents who can afford to leave some earnings in the corporation and pay lower tax rate.
Future Regulatory Developments
The Ontario government announced that the second phase of regulatory developments, expected later this fall, include public consultations with consumers and real estate professionals that focus on additional measures to support a high level of ethical standards in the real estate sector, including:
Updating and modernizing the Code of Ethics for real estate professionals;
Implementing disclosure requirements to better protect consumers; and
Improving regulatory efficiency and enhancing professionalism in the industry by updating the authority and powers of the Real Estate Council of Ontario.
Ontario Personal Real Estate Corporations (PREC):
As of October 1, 2020, Personal Real Estate Corporations (PREC) have been permitted in Ontario. This is fantastic news for Ontario Realtors as it will allow those in higher tax bracket to defer (and potentially save) on taxes.
Full details on PRECs are found on the Ontario Regulation here, but let’s go over the criteria below.
Criteria for Personal Real Estate Corporations (PREC)
The corporation is incorporated or continued under the Business Corporations Act.
All of the equity shares of the corporation are legally and beneficially owned, directly or indirectly, by the controlling shareholder.
The sole director of the corporation is the controlling shareholders.
The president, being the sole officer of the corporation, is the controlling shareholder.
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.
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.
What are Personal Real Estate Corporations (PREC)?
Personal real estate corporations are now a reality in Ontario after the Government of Ontario’s introduction of new legislation (Trust in Real Estate Services Act (TRESA)) that will modernize the old Real Estate and Business Brokers Act, 2002 (REBBA). Essentially, this means that individual Ontario real estate agents will now be able to incorporate their business. This would allow them to offer more services to clients, invest in new technology and create jobs in their community. More importantly, this opens up avenues for better tax planning for Ontario realtors, which we will discuss below.
What Do Personal Real Estate Corporations Mean for Taxes?
Does it mean Real estate professionals will pay less taxes with Personal Real Estate Corporations in Ontario? Or would they have undue advantage after incorporating? The answer is NO. However, a Corporation definitely opens up some avenues for better tax planning in the long-term. Our Canadian tax system is fundamentally based on the concept of ‘integration’. In simple terms, integration means that everyone should pay the same amount of taxes whether you are incorporated, or you are an individual filer. Does integration work perfectly in the real world? A perfect integration does not exist.
Currently, real estate agents report their income as sole proprietorship. This means that you an agent will have to pay taxes on the entire amount you earned minus your applicable deductions in that one year. However, with this change , you as an agent will be able to claim all the allowable deductions under your corporation. But, you will have the opportunity to defer your income taxes by not withdrawing all your profit out of the corporation in the same year. Income taxes will be payable at corporation level, not individual level. You will only pay personal taxes to the extent you withdraw money from the corporation.
Under the current system, if a real estate agent earns $250,000 in commissions, they have no choice but to pay income taxes on the entire amount minus applicable deductions. Under the proposed Personal Real Estate Corporation structure, if an Ontario realtor makes $250,000 in commission in any given year, they will first pay corporate taxes at the corporation level, and then personal taxes at their personal tax rate only to the extent that they withdraw funds out of the corporation for personal use.
As such, for high income earners who do not need their entire earnings immediately, there is an opportunity to defer personal income, and therefore personal taxes, into the future. This would be especially beneficial to real estate agents whose earnings can fluctuate significantly year over year depending on the timing of their closings.
If you have business law questions, including questions about business formation and organization and business operations , or whether a Personal Real Estate Corporation is right for you, contact the knowledgeable business lawyers at Bhardwaj Law Professional Corporation at 4167477777 or via email.