Personal Real Estate Corporations (PRECs) in Ontario

Great News to Ontario Real Estate Professionals… Personal Real Estate Corporations (PRECs) in Ontario

Today, The Government of Ontario announced key strategic changes which will modernize the rules for registered real estate brokerages, brokers, and salespersons across the province of Ontario. Phase One was announced today, Oct.1st 2020, includes regulations that closely align real estate professionals with modern business practices.

The new measures will Allow real estate professionals to incorporate and be paid through Personal Real Estate Corporations (PRECs). For more information please visit us at www.ontrackaccounting.com

This is a result of efforts which started over a decade ago to help Realtors® achieve much needed tax fairness, which will result in a more efficient business environment, by getting paid through Personal Real Estate Corporations (PRECs) in Ontario.

As a Real Estate Professional – What does this mean to you to have a Personal Real Estate Corporations (PRECs) in Ontario ?

Five main tax-saving opportunities

It is very important and central to understand the tax benefits of incorporation, and it also comes at a cost and some additional responsibilities.

The Basics:

The corporate Tax Rate is 12.5% on the first $ 500,000 for small business corporations
The marginal tax rate on earnings above $220,000 per year is 53.5%
Of course, once you withdraw funds from the corporation, that money is subject to your personal tax rate.

With a bit of tax planning, you have a great opportunity to minimize the amount of taxes you pay if you setup a Personal Real Estate Corporations (PRECs) in Ontario. As professional Tax Accountants in Mississauga, Oakville and Downtown Toronto we specialize in corporate tax filing and tax planning for real estate agents

1- Tax deferral

# One of these benefits is the ability to defer taxes by earning your commission income inside your Personal Real Estate Corporations PREC, which is taxed at a lower rate than personal income tax rate. Allowing the excess income to be invested inside the corporation, with personal taxes limited to only what you draw out as a salary or dividend.

Shall you take out a salary or dividends or a mix of both ???
That is a whole different conversation which needs to be looked at on each individual situation
If you have any questions regarding your tax planning, please feel free to contact us at www.ontrackaccounting.com

2- Income Splitting

# Two of benefits from setting up a Personal Real Estate Corporations PREC is the opportunity to income splitting. However, this area is very crucial because few years ago, the federal government has established strict rules around Taxes on Income Splitting.

You have two options to use in your Personal Real Estate Corporations PREC to split income with lower-earning family members by paying your family members a salary or issue them dividends.

The condition is that, when paying salaries, the salary must be for “reasonable services performed”, which means your family members must be actively engaged in the business.

You can also pay your family member a reasonable amount of dividends if your family member is actively engaged in the business and is averaging at least 20 hours a week )or is receiving a reasonable amount of dividends based on their work performed, property contributed, or risks assumed relative to the corporation.

These are very strict rules introduced by the federal government

3- Declare dividends Versus taking a salary

# Three of benefits from setting up a Personal Real Estate Corporations PREC is that the Real estate professionals who are self-employed are pay CPP both the employee and employer portion. The combined amount of CPP is currently around $ 5800

When you are incorporated, you will have the opportunity to pay yourself either a salary or dividends. If you pay yourself a salary, you’ll still need to remit CPP. But if you pay yourself a dividend, CPP contributions aren’t required, leaving you with excess cash to invest in other income-producing investments.

So shall I take a Salary or Dividends ? or a mix of both ???
That is a whole different conversation which requires a more in-depth conversation and requires we look at each individual situation. Be careful of the effect of paying yourself dividends and the impact of that on claiming child care expenses and making RRSP contributions.

If you have any questions regarding your tax planning, please feel free to contact us at 416.454.8812
As professional Tax Accountants in Mississauga, Oakville and Downtown Toronto we specialize in corporate tax filing and tax planning for real estate agents.

4- Timing your Pay

# Four – In Canada, the more money you earn in a year, the higher your tax rate will be. And the lower money you earn in other years, the lower your tax rate will be —This is a very simple technique, so it makes sense to withdraw funds during a slow year for example or upon retirement or in a year where you decided to take a tour around the world and your income will be lower or for example if you ’re taking a year off as a parental leave.

5- Investing Your Retained Earnings Inside the Corporation

# Five – When you leave the excess income inside the corporation and pay the lower corporate tax rate of let’s say 12.5%. You should only take out what you need outside the corporation and do not take out all what you earned. This would allow excess income inside the corporation to accumulate and may be after a year or few, you may want to invest the money inside the company, rather than taking it out and getting highly taxed on your personal hand with high personal taxes rates. Since the personal taxes only applies when you draw out funds as either a salary or dividend. However, the catch here is that the return on Investment (income generated from the investments) inside the corporation gets taxed at a higher since it is considered to be an inactive income.

Investing under a corporation and taxes on passive Income inside a corporation.
That is a whole different conversation which needs to be looked at on each individual situation
If you have any questions regarding your tax planning, please feel free to contact us at www.ontrackaccounting.com

The process of being incorporated can be a bit complex and dynamic, however it is can be an excellent tool for real estate agents to maximize their tax saving and keep their hard-earned commissions in their corporations.

With a bit of tax planning, you have a great opportunity to minimize the amount of taxes you pay. As Professional Tax Accountants in Mississauga, Oakville and Downtown Toronto, we specialize in corporate tax filing and tax planning for real estate agents