On March 4, 2020, Bill 145 received royal assent. It brings many changes, including the renaming of the Real Estate and Business Brokers Act, 2002 to Trust in Real Estate Services Act, 2002. For real estate agents, however, the most exciting change that Bill 145 brings may be that real estate agents now join with lawyers, accountants, and doctors, in the ability to form personal corporations. Outlined below are features of PRECs that may be of most interest to real estate agents:
Limiting Personal Income Tax and use as an Investment Vehicle:
One of the primary motivating factors among real estate agents who seek to incorporate is the ability to reduce the amount of income tax they pay personally.
Currently, the highest marginal rate of personal income tax in Ontario is 53.53%, this rate being applied to net income exceeding $220,000. Using a PREC, real estate agents may be able to defer tax, taking advantage of the lower tax rates available to eligible businesses. For example, eligible businesses in Ontario pay taxes at a rate of about 12.5% for the first $500,000 of net income and 26.5% on any amount of net income exceeding this amount.
By leaving income in a PREC, real estate agents will be able to defer or avoid paying the higher marginal rates on personal income, and slowly pull income from their PREC at a time when they can control the maximum marginal rate they will pay, for example after they have retired. This is a similar strategy that individuals employ with RSPs, for example. Any money generated in the PREC from year to year that is not taken out as personal income can be left in the PREC and used for investments to generate further revenue within the PREC.
Dividends vs Salary:
Through a PREC, real estate agents will be able to determine whether they take personal income in the form of salary or dividends. In contrast to self employed real estate agents not operating through a PREC, real estate agents operating through a PREC are not required to pay the employee and employer amounts toward their CPP contributions, as long as they declare dividends instead of salary when withdrawing funds from the PREC.
Of course, careful consideration should be given to the pros and cons of paying dividends verses salary.
Incorporating as a PREC could provide real estate agents with opportunities to share their income with other family members (“income splitting”), which could enable them to take even more advantage of potential tax savings. While there are certain restrictions in terms of the work expected of a family member (e.g. actual hours spent working for the PREC), it is certainly an option worth exploring with an accountant.
While there are many benefits and advantages to creating a PREC, it is important to keep in mind that a PREC needs to be run in a manner that meets all of the requirements outlined under the Ontario Business Corporations Act (“OBCA”).
An example of one such requirement under the OBCA is that a PREC is required to keep an up-to date corporate minute book. Failing to do so can trigger further examination by the Canada Revenue Agency in the form of audits. Currently, failure to adhere to the requirement to maintain up to date records can result in fines to individuals of up to $2,000 and a year in prison. For corporations, the fine could be as high as $25,000. In the most extreme scenarios, a penalty could include imprisonment for up to 1 year. While these penalties are rarely imposed, they are available to the government, and they highlight the importance of complying with the OBCA.
Even with the compliance obligations, the advantages PRECs offer to real estate agents are clear. If you are a real estate agent interested in setting up your own PREC, or if you simply have questions regarding the process, our team of corporate lawyers at Barriston LLP would be pleased to assist you!
Janice Mumberson and Charles Lund