A personal real estate corporation, or PREC, is a legal corporation that allows a real estate agent to earn their business income through a corporation and pay the expenses of their real estate business. British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia, and Ontario, are among the provinces that allow PRECs.
Incorporating comes with a lot of tax benefits, deferral opportunities and income splitting options are some of those, and
certain benefits associated with PREC will also be touched here. You keep more of your income if you pay fewer taxes. Income that can be invested or used to help you achieve your dream of early retirement.
Following are some of the important benefits that are associated with PREC:
Tax Deferral
The opportunity to defer income tax is one of the key benefits of incorporation for a realtor. Realtors who are incorporated can defer their tax payments by placing a portion of their earnings in the corporation and only paying taxes when the funds are withdrawn. If a real estate agent does not incorporate their business, all of their real estate earnings will be recorded on their personal tax return, which will be subject to a high tax rate.
In Ontario, The tax rate on small business income on the first $500,000 is 13.5%. Income that is above the $500,000 mark will be taxed at a rate of 26.5%. Going down this path can give agents a tax reduction of up to 38.53%, a more favorable tax rate. This means that if a real estate agent saves his income in a PREC, not only can taxes be deferred, but tax money that would otherwise be paid in personal taxes can also be saved. Only incorporated agents are eligible for this tax deferment; unincorporated agents are not qualified hence they do not have the option to defer tax.
Income splitting with family members
Income splitting is advantageous since it results in additional tax savings. A real estate agent can save a great deal of income tax by moving income from a high-income person to a low-income one. By income splitting with your corporation, you can reduce your family’s overall tax burden by utilizing family members in lower tax brackets, such as your spouse, parents, or children. With this, a realtor can name a family member as a shareholder but the realtor must own all voting shares of the company.
You probably heard of TOSI or the Tax On Splitting Income before, if not, TOSI is a punitive rule that has been around for all Canadian private corporations since 2018, most dividends paid to family members will be considered split income and taxable at the top tax rate, negating the income-splitting benefits.
Good thing there are exceptions to these TOSI rules, one of those is if the realtor is over the age of 65. Other exceptions can be found here.
Lifetime Capital Gains Exemption (LCGE)
While it is unlikely that a realtor will be able to sell his or PREC’s shares in the future, if the corporation is a qualified small business corporation (QSBC), a shareholder may be able to claim an $800,000+ lifetime capital gains exemption (LCGE) when those shares are sold. The actual capital gains deduction is 50% of the capital gains exemption.
A share of a corporation will be considered to be a qualified small business corporation share if all the conditions are met.
Non-Deductible And Partially Deductible Expenses
You may also be eligible for a small tax reduction on certain business expenses that you acquired which are not fully deductible. Fact that such expenses are incurred by the PREC, the applicable tax rate is 12.5 percent, but paying these charges individually results in a tax rate of 53.53 percent. As a result, if paid out of your PREC, you may be eligible to save a certain amount.
Going down the incorporation road is an intensive process and can become quite cumbersome but we at IDM Professional Corporation CPA are here to provide you with the services and guidance you need.
