Are you a real estate agent in Ontario? If so the newly allowed formation of a Personal Real Estate Corporation (PREC) can create a variety of tax-planning opportunities. Whether you were aware of these or not, SHARP & Associates is once again here to answer any questions you may have.
What is a Personal Real Estate Corporation?
A Personal Real Estate Corporation (PREC) is a corporation which allows a real estate agent to earn income through the corporation, rather than personally. It functions similar to professional corporations which are already in existence for accountants, lawyers, etc.
What Potential Tax Impact Does Forming a PREC Create?
Earning income in a PREC can lead to tax deferral, as corporations generally pay a lower tax rate than individuals. Ontario small businesses which earn less than $500,000 in income are subject to a tax rate of only 12.2%, whereas individuals are taxed between 29.65% and 53.53%, based on their income.
When Would an Individual Realtor be Subject to Tax on a PRECs Earnings?
Individual real estate agents would only be taxed at the personal tax rate when income is withdrawn from the corporation. However, even then, this income can be paid out as a dividend which would be taxed at a lower rate, depending on the individual’s income.
Can the Corporation’s Income Be Split Amongst Family Members?
Realtors can issue non voting shares to family members, but must hold all of the voting shares themselves. Tax on Split Income rules applied to Canadian private corporations would deem dividends paid to family members as split income, which is taxable at the highest tax rate, unless the following apply:
The realtor is over the age of 65 (regardless of the age of their spouse) OR
The realtor’s spouse works at least 20 hours per week in the business over the course of the year.
Which Expenses are Deductible by a PREC?
Most expenses which are already deductible by an individual real estate agent are also deductible in a PREC. There are some additional expenses which are also deductible by a PREC, which are not by an individual, namely:
A Health Spending Account (HSA) can be setup which allows business owners to be reimbursed for personal medical expenses, without the reimbursements being taxable for the individual.
Retirement counselling paid for by the corporation.
Can Income Earned by the Corporation be Reinvested?
Yes. Income earned by a PREC can be reinvested in stocks, bonds, mutual funds, etc. and the income earned by these investments can continue to be held within the corporation.
Can Real Estate Investors Setup PRECs As Well?
No. PRECs can only be formed by real estate agents. However, real estate investors may choose to set up a regular corporation to hold their real estate investments, and may incur tax benefits from doing so as well.
So, if you’re a real estate agent in Ontario looking to create a PREC, or are in need of any other assistance, from tax planning to bookkeeping and everything in between, be sure to Click the “Get in Touch” button to get started.
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