Bill 145, Trust in Real Estate Services Act, 2019, is currently being considered by the Standing Committee on General Government, after which it will be called back for a third reading, and then royal assent. If the Bill receives Royal Assent, it will provide realtors in Ontario with the ability to earn commission income in a corporation. Currently, real estate commissions cannot be paid to corporations as corporations are not registered under the Real Estate and Business Brokers Act. However, if Bill 145 passes, most realtors will be able to establish a Personal Real Estate Corporation (PREC) and earn commission income inside the PREC.
By operating out of a PREC, the realtor will not limit their professional liability or affect their professional obligations; however, certain tax benefits may be realized.
One of the most significant tax benefits of earning income through a corporation is the ability to defer income tax on income that is earned by the PREC but not withdrawn by the realtor. If a realtor’s after-tax earnings exceed their personal cash flow requirements, they should be able to benefit from this income tax deferral by incorporating a PREC (if Bill 145 passes).
Let’s take a basic example to illustrate the income tax deferral benefit:
If a realtor earns $500,000 per year, net of business expenses, personally, then the realtor would pay approximately $234,000 of personal income tax and would be left with after-tax cash of approximately $266,000. Let’s assume that this realtor only needs $100,000 per year to cover their personal cash flow requirements. This would leave the realtor with excess cash of $166,000, which they may choose to invest for retirement.
If Bill 145 passes and the realtor were to incorporate a PREC, the realtor can choose to earn the $500,000 per year, net of business expenses, in a corporation. The realtor would withdraw a salary of $148,000, upon which personal taxes are paid. After Canada Pension Plan contributions and personal income taxes are withheld on this $148,000 salary, the realtor would be left with $100,000 personally to cover their personal cash flow requirements. The remaining amount of approximately $350,000 would be taxed inside the corporation at the corporate tax rate of 12.5% (in Ontario, on the first $500,000 of active business income, shared by associated corporations), equivalent to approximately $43,000. This would leave approximately $307,000 of remaining excess cash inside the corporation, which the realtor may choose to invest for retirement.
Comparing the two scenarios:
In the first scenario in which the realtor was unable to incorporate, the realtor had excess cash of $166,000 personally, while in the second scenario whereby the realtor was able to incorporate, the realtor had excess cash of $307,000 inside the corporation.
Although personal tax will eventually need to be paid on the $307,000 in the latter scenario, this personal tax only needs to be paid once withdrawn from the corporation. If the realtor does not need short-term access to this cash to fund personal cash flow requirements, they can realize a significant advantage by investing the $307,000 annually inside the corporation, as opposed to investing the $166,000 personally. Depending on the rate of return earned on the investments, the amount of time that it is invested, and other factors, the realtor can benefit from greater retirement savings in the hundreds of thousands if given the ability to incorporate.
Is there a downside? The corporation will have its own income tax filing requirements, compliance requirements and costs. These include legal costs on incorporation, annual corporate income tax filing costs and annual legal costs, such as updating corporate minute-books. Therefore, prior to incorporating, analysis should be completed to ensure that the benefits, such as the income tax deferral benefit, are expected to outweigh the costs.
Incorporation is not recommended in every situation, as each realtor’s financial situation is different. Realtors who are considering incorporation following the royal assent of Bill 145 (if Bill 145 passes) should consult their accountant and lawyer prior to incorporation.
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