On October 1, 2020, the Ontario government announced new regulations and amendments to the Real Estate and Business Brokers Act, 2002 (REBBA) that allow real estate brokers and salespersons to incorporate “personal real estate corporations” (“PRECs”). Simply put, the amendments to REBBA allow a brokerage to pay remuneration to a PREC instead of directly to the real estate broker or salesperson.
There are many benefits to incorporating including, tax deferrals, income splitting with family members, and access to corporate tax rates. The foregoing generally leads to paying fewer taxes and retaining more income. Deferred taxes are current tax payments that are pushed (“deferred”) into the future. This is advantageous because it allows money to grow tax-free until it is withdrawn at a later date, for example, at retirement when the retiree has less income. Income splitting is a process whereby a higher-earning family member transfers part of his/her income to a lower-earning family member. This reduces a household’s overall tax bracket. Note that as of January 2018, the federal government expanded tax on split income rules which has limited or eliminated certain tax benefits of income splitting.
By way of simple example, a realtor with a yearly income of $220,001 may have to pay approximately 50% of that amount in income tax. A corporation is taxed at a rate closer to 15% for the first $500,000 of revenue/active income – this is known as the “small business tax rate”. By leaving extra cash in the corporation, it can build passive income, which can also be paid out by the corporation to the realtor at a later date. It is important to point out that after a certain threshold, passive income earned from corporations reduces the amount of active income eligible to be taxed at the small business tax rate.
While we recommend seeking advice from your accountant on whether incorporating will be beneficial to you from a tax perspective, we would be happy to speak to you about the legal requirements, benefits and limitations of incorporating a PREC for your practice.
If you are interested in learning more, we welcome you to connect with us for a complimentary consultation.
Brian Wong is an associate lawyer with a focus on private equity, lending, IP/IT, and privacy law. Prior to joining Ross Rumbell , Brian worked at large Canadian law firms supporting a variety of corporate/commercial practice areas. He also has a background in life sciences and has worked at an international biotechnology company. In his spare time, Brian enjoys learning Mandarin, travelling, and playing golf.