IS PREC RIGHT FOR ME?
After more than ten years advocating for the right to incorporate, the Ontario REALTORS® are now be permitted to operate their business through a personal real estate corporation (PREC). For Realtors who will benefit from a PREC, it can significantly lower their tax burden, helping them reinvest in their business and save for the future.
The PREC model for Realtors is flexible and Realtors who use a PREC may be able to:
· Achieve tax deferrals
· Benefit from the Lifetime Capital Gains Exemption for shares of a qualified small business corporation
· Income split
· Utilize holding corporations to own and manage their other investment and business activities along with their core real estate trading activities
· Retain real estate related income in the PREC to generate investment income or to be reinvested in active business activities
While this change is historic, there are advantages and disadvantages to the creation and use of a PREC based on each Realtors personal circumstances. RANEX Realty Group urges all Realtors to seek out independent accounting and tax advice when deciding whether or not to incorporate.
What Do PREC Mean for Taxes?
REALTORS® before PREC report their income as sole proprietorship. This means they will have to pay taxes on the entire amount earned minus applicable deductions in that one year. With PREC however, agent will be able to claim all allowable deductions under the Corporation. Agents will have the opportunity to defer Income Taxes by not withdrawing all your profit out of the corporation in the same year.
Income Taxes will be payable at corporation level, not individual level. You will only pay personal taxes on the amount you withdraw from the corporation. Therefore, for high income earners who do not need their entire earnings immediately, there is an opportunity to defer personal income, and therefore personal taxes, into future years.
Should a Real Estate Agent Incorporate?
What are the Advantages and Disadvantages?
Incorporating your real estate business has its advantages and disadvantages explained below:
Advantages of incorporation:
· Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% and up to 52% personal taxes on entire earnings.
· Tax deferral opportunities will allow the agent to grow money on tax deferral basis through various investment vehicles.
· Income splitting between spouses. Of course, be aware of TOSI rules (Tax on split income)
· Incorporation setup could range from $1,000 to $1,500.
· Higher accounting fees for corporate annual filing.
· Stricter compliance as agents will be required to submit T4 if you decide to withdraw money through payroll for yourself and spouse. Also, you must make remittance payment on monthly basis to stay in compliance with CRA.
There is really no advantage if agents withdraw all their commission earnings for personal use. It is an advantage only for high commission earning agents who can afford to leave some earnings in the corporation and pay lower tax rate.
OREA has more information on this and we are always here to guide you and answer your questions. Feel free to contact our Broker of record Nick Jubran to see if setting up a Personal Real Estate Corporation is right for you.