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Incorporation for Real Estate Agents in Ontario

Bill 145, Trust in Real Estate Services Act, 2020 received Royal Assent on March 4, 2020 meaning that real estate agents in Ontario are allowed to incorporate their own Personal Real Estate Corporation (PREC).

Rules, regulations and licensing details will be readily available in the coming months outlying how a PREC is to operate in Ontario.

Real estate agents in Ontario are finally able to operate their business using their own PREC and can now look forward to the following:

1. Reduction of Overall Tax

The effective tax rate applicable on the first $500,000 of active business income earned by the PREC is only 12.20%. By comparison, an Ontario resident real estate agent who is already at the highest marginal tax rate will be subject to an effective tax rate of 53.53% for every dollar earned above $220,000 in 2020.

2. Defer Income Tax

Real estate agents in Ontario can now earn income in their PREC and be taxed at the Ontario small business tax rate of:

  • 12.20% on the first $500,000 of income earned; and
  • 26.5% on income in excess of $500,000.

After-tax profits left in the PREC allow the real estate agent in Ontario to defer up to 41.33% of taxes for 2020. Payment of personal taxes will be triggered upon withdrawing such funds from the PREC by way of dividend. This certainly helps mitigate year-to-year revenue fluctuations!

3. Fund Non-Deductible Expenses

Incurring non-deductible expenses (meals, entertainment, life insurance, conferences, etc.) in a PREC provides for a lower tax cost compared to such expenses being incurred directly by the real estate agent.

Real estate agents in Ontario (at the top marginal personal income tax rate) will have to earn $21,500 pre-tax to fund $10,000 of non-deductible expenses. By contrast, the pre-tax cost of such expenses incurred in the PREC is only $11,400.

4. Capital Gains Exemption

Canadian taxpayers who dispose of their shares of a Qualified Small Business Corporation (QSBC) may be eligible to use their Lifetime Capital Gains Exemption (LCGE) to shelter up to $883,384 of capital gains for the 2020 tax year.

Real estate agents in Ontario will be able to sell the shares of their PREC and may be eligible to save up to $236,000 in taxes by using their available LCGE for the 2020 tax year.

5. Ongoing Administration Costs

The costs related to setting-up a PREC are as follows:

  • Incorporation legal fees;
  • OREA initial licensing and annual renewal fee;
  • Annual corporate income tax returns, HST, EHT and WSIB filings;
  • Annual financial statement preparation; and
  • Annual corporate minutes maintenance.

Incorporation may not be recommended for every real estate agent in Ontario, as each realtor’s financial situation must be carefully reviewed.

Please contact SB Partners to learn more about this opportunity.

Please contact SB Partners to learn more and we would be pleased to assist real estate agents in Ontario looking to setting-up their own PREC and access similar tax savings other regulated professionals have been enjoying for over a decade.

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