Province of Ontario brought an awesome news for all realtors in the province. As of October 1, 2020, Personal Real Estate Corporations (PREC) have been permitted in Ontario, by which a real estate agent can take advantage of higher tax bracket to defer (and potentially save) on taxes.
A Personal Real Estate Corporation (“PREC”) allows a real estate agent to take advantage of the benefits of incorporating a real estate business. It is great news for realtors as it allows real estate agents in higher tax brackets to defer taxes and save on taxes. Much like doctors, lawyers, engineers, and accountants it is now possible for real estate agents to incorporate their business. If a real estate agent incorporates their business, they will be entitled to the same advantages as other professionals.
Rules 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.
- 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.
- 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.
Advantages of Personal Real Estate Corporation:
- Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% personal taxes on entire earnings.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)
Disadvantages of Personal Real Estate Corporation:
- A personal real estate corporation must have an article of corporation that comply with the specific rules and regulations. Hence the article of corporation is prepared by a corporate lawyer. And therefore, the cost of incorporation for a personal real estate corporation is higher than a regular standard corporation.