Should you set up a Personal Real Estate Corporation?

If you are a real estate agent in Ontario, you may be aware that The Government of Ontario introduced new and amended regulations to the Real Estate and Business Brokers Act, 2002 (REBBA) on October 1, 2020. These new regulations have provided opportunities for Ontario real estate agents to incorporate by setting up a Personal Real Estate Corporation (PREC). What do these entail, and should you consider creating one?

✓ Tax Advantages.

By incorporating, your business commissions will not be paid to you personally, but to the corporation. For a real estate agent in Ontario, the higher marginal tax rate on $200,000 in earnings is 42.32 per cent. However, since a PREC is eligible for the small business deduction, the combined federal and Ontario corporate tax rate on that same income earned is 11.5 per cent as of 2021. This lower tax rate is available to all Canadian Controlled Private Companies (CCPC’s) on the first $500,000 of active income each year. Incorporating makes the most sense for high income earning agents. Unfortunately, there’s no real advantage for an agent who needs all their earnings for personal use.

✓ Income Splitting.

With a PREC you can potentially split your business income for tax benefits by paying dividends to shareholding adult members of your family who work for the business 20 hours or more per week. By paying dividends, you can be flexible in how you dispense income to lower the combined tax load for your family and the business. You can change the amount of dividends you pay and who receives them from year to year.

✓ Lifetime Capital Gains Exemption.

A major benefit of incorporation is succession planning. Eligible PREC’s are entitled to Ontario’s cumulative Lifetime Capital Gains Exemption (LCGE). This once in a lifetime tax exemption is based on net gains realized on the sale of Qualified Small Business Corporation (QSBC) shares. This means that you could eventually sell your PREC’s shares and spare you from paying taxes on all or part of the profit you’ll earn. As of 2021 the LCGE is $892,218 but the amount increases annually by 2%. For many small business owners, the LCGE is a tool to help them save for retirement. Be sure to consult with an accountant to ensure your PREC is structured correctly.

✓ What to keep in mind before incorporating.

If you are planning on forming a PREC and would like to learn more about PRECs in Ontario, you can do more research on the Ontario Real Estate Association’s website. There you can find a video, a PowerPoint presentation, a Webinar and more. You will need to ensure you meet the criteria and conditions set out in the legislation. There is a $300 fee to file articles of incorporation under the OBCA. Although you can incorporate or register a PREC by yourself through Ownr (and get a 20 per cent discount), you may find the DIY route more difficult after the initial set up.

✓ Is a Personal Real Estate Corporation right for you?

The advantages of forming a PREC can vary depending on your business. You should consider forming a PREC if you are earning more than you need to meet your daily living expenses and you want to take advantage of income tax deferral opportunities. You can split income with family members, save more money for retirement, and maybe even take advantage of the lifetime capital gains exemption. If this sounds like your personal and business situation, consider contacting an accountant who provides advisory services to discuss the details of forming and maintaining a PREC.