As part of Bill 145, the Trust Real Estate Services Act (the “Act”) received royal assent on March 4, 2020. The Act will replace the Real Estate and Business Brokers Act, 2002, and in addition to strengthening consumer protection and professionalism within the real estate industry, the Act brings about a fundamental change in the way that real estate agents may operate within Ontario – as of October 1, 2020 realtors will be allowed to incorporate by setting up a Personal Real Estate Corporation (“PREC”). PRECs are new to Ontario, but have been permitted in some other provinces (including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia) for several years.
A PREC is like any other corporation with one major caveat – it is limited to providing the services of its shareholder to the brokerage and cannot generate revenue through any other activity. Similar to other corporations, however, a PREC will be considered a separate legal entity and can provide realtors with a wide range of tax planning opportunities not previously available including:
- Income tax deferral – the highest marginal tax rate in Ontario is approximately 53.5% on income over $220,000. Income that flows through a PREC would be taxed at a lower corporate tax rate ranging from 12.2 – 26.5%. This means that only the funds drawn from the PREC by way of either a salary or dividend would be subject to the higher personal tax rates with the remaining funds being reinvested within the PREC or in other income-producing assets, resulting in potentially significant tax deferral advantages for the realtor.
- Income splitting – under the Act, family members can own non-equity shares of the PREC, thereby allowing for distribution of income to those members of the realtor’s family with the lowest tax burdens and could result in a net decrease in overall tax paid.
- Retirement and estate planning – realtors may structure a PREC to hold real estate or other income-producing assets which may provide retirement income in a more tax-efficient manner and may provide opportunities to limit the amount of “death tax” that is payable by the estate of the realtor.
- Lifetime capital gains exemption – realtors may be able to able to sell the shares of a PREC and shelter any gain under the $883,384 lifetime capital gains exemption under certain circumstances.
While there are many potential benefits for realtors in deciding to incorporate a PREC, there are other factors that should considered as well. Incorporating a business can involve additional costs and has ongoing reporting and other regulatory requirements. As a general rule, if one’s earnings exceed their personal financial needs, incorporation may result in a net benefit however, it is important to get taxation professional advice before making any decisions. We are always happy discuss your personal situation and assist you in deciding whether incorporating a PREC is right for you.
The foregoing is a summary of possible tax outcomes, but we do not guarantee any specific outcome. Everyone’s personal and corporate tax plan is different. Please consult with your accountant or tax advisor for a specific tax plan that benefits you. This article is no specific tax or legal advice and is only of general concepts.
Information is current as of November 25, 2020 and may not be updated based on changes in tax rules.
By Michael Bluestein, Melanie Sokalsky and Kunal Sethi