Ontario real estate salespersons and brokers are now permitted to incorporate in Ontario with the passage of Bill 145 of the Legislative Assembly of Ontario. While Bill 145 of the Trust in Real Estate Services Act received royal assent on March 4, 2020, supporting regulations are not yet finalized. Once in force, though, these regulations will provide great opportunities for Ontario real estate salespersons and brokers to incorporate by setting up a Personal Real Estate Corporation (P-REC).
Is incorporation right for you?
Like any other corporation, a P-REC will be considered a separate legal entity from its shareholders. This will allow Ontario real estate agents and brokers to benefit from a wide range of tax planning and other opportunities.
At a high level, you may want to explore the potential benefits of incorporation 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
- Wants to take advantage of the $883,384 lifetime capital gains exemption
Additionally, incorporation possibilities may give Ontario real estate salespersons and brokers the ability to effectively structure their real estate holdings where excess cash is used to purchase real estate or other income producing assets. From a succession perspective, forming a P-REC may also allow real estate professionals to take advantage of estate planning opportunities when they retire. To understand if a P-REC is right for you, it makes sense to speak with a professional advisor.
Exploring the opportunities
To understand the benefits of incorporation and the possibility of providing for significant income tax deferral opportunities, consider the following example.
For a real estate agent in Ontario, the highest marginal tax rate on earnings in excess of $220,000 is approximately 53.5 percent. Earning income through a P-REC, however, would allow the corporation to pay tax on the income earned inside the corporation—and those rates range from 12.2 percent to 26.5 percent in 2020. This would allow excess income to be invested inside the company, with personal taxes only applying when you draw out funds as either a salary or dividends.
In addition, you may be able to split income with your family members, such as a spouse or adult children. For instance, your family members could own non-equity shares of the company, which could allow them to earn dividends from the business. You could also pay lower-income family members salary or wages, which would be taxed at their personal tax rates—which will presumably be lower than your tax rate. Bill 104 of the Tax Fairness for Realtors Act provided some additional guidance on the proposed shareholdings of a P-REC, but the recommendations have yet to be approved into law.
What to consider when incorporating
There are certain considerations that you should be aware of with setting up a P-REC. For instance, to take advantage of the $883,384 lifetime capital gains exemption, the P-REC needs to qualify as a qualified small business corporation. As such, retaining too much cash in the P-REC or investing in non-qualifying assets could put the status of the P-REC offside if the entity is sold to a third party. In addition, shareholders need to consider the tax on split income rules where there are attempts to split income with your family members.
Incorporation can also introduce added costs and complexity. These include additional tax filing requirements and the need to maintain proper legal documentation.
To avoid these obstacles and keep costs under control, proper planning is essential. If you’re considering setting up a P-REC, a Grant Thornton advisor can help you determine if incorporation makes sense for you, help get you up to speed about your compliance requirements and provide you with a range of tax planning opportunities. Over the coming months, we’ll also keep you updated on new guidance and clarification around this legislative change.