Benefits of Personal Real Estate Corporations for Realtors

Tax Deferral

Often, the most significant benefit from Personal Real Estate Corporations (PREC) is the tax deferral opportunity. In Ontario, the corporate tax rate is 12.2% for the first $500,000 of active business income (real estate commission) for 2020. Income over the small business limit is taxed at the general corporate tax rate of 26.5%. In contrast, in 2020, the lowest personal tax rate is 20.05%, and the highest is 53.53%. If you’re generating more income than needed to cover your living costs, there can be significant tax savings through incorporating.

 

Limited Liability

Corporations, in general, provide limited liability for their shareholders. This is legal protection for shareholders preventing individuals from being held personally responsible for their company’s debts or losses. The exception for PRECs is the regulatory body that governs real estate trading in Ontario. In this case, the Real Estate Council of Ontario will still directly deal with the individual licence holder. Any offences are handled directly with the individual, which is the same treatment applied to Ontario realtors since 1997.

 

Income Splitting

When setting up PREC’s, you can issue non-equity shares to family members (parent, spouse, children, etc.) to allow for possible income splitting. This splitting may let you take advantage of lower tax rates to save even more. There are specific rules to determine the amount of income to be split with family members, so consulting with your RLB advisor is vital to ensure compliance with split income (TOSI) rules.

 

Retirement & Estate Planning

From a retirement planning perspective, if the shareholder uses the tax deferral, the corporation’s excess funds can be retained or invested in the corporation to grow over time. You can draw the money kept in the corporation during retirement, when you are more likely to have less income and pay tax at a lower marginal tax rate. The Personal Real Estate Corporation rules do have restrictions on the types of investments you can hold within the corporation, so it is important to consult with your RLB advisor when pursuing investment opportunities.

 

Consider having a second will that deals directly with your ownership in this corporation from an Estate planning perspective. This second will could potentially save probate fees in your estate. 

 

Book a consultation with the RLB team today!