Personal Real Estate Corporations – Brief Tax Overview
Personal Real Estate Corporations (O. Reg. 536/20)
What is a Personal Real Estate Corporations?
As of October 1st, 2020, individual Ontario real estate agents are now permitted to incorporate a Personal Real Estate Corporation (“PREC”).
Some of the criteria for a PREC is listed below:
All the equity shares of the corporation are legally and beneficially owned, directly or indirectly, by the controlling shareholder.
The sole director of the corporation is the controlling shareholder.
The president, being the sole officer of the corporation, is the controlling shareholder.
Each non-equity share of the corporation is,
legally and beneficially owned, directly or indirectly, by the controlling shareholder,
legally and beneficially owned, directly or indirectly, by a family member of the controlling shareholder, or
owned legally by one or more individuals, as trustees, in trust for one or more children of the controlling shareholder who are minors, as beneficiaries.
For more information on other criteria and limitations, please see the checklist below:
https://www.reco.on.ca/wp-content/uploads/PREC-Checklist.pdf
What impact does this have on my tax returns?
Assuming that all your remuneration from your brokerage firm is received by your PREC, you do not report the payment from the brokerage (and the applicable expenses to earn the remuneration) on your T1 personal tax return. Your PREC shall pick up the income (and deduct the applicable expenses).
Assuming your PREC is not associated with any other corporations, the PREC’s will be taxed at the Ontario small business tax rate of 12.20% on the first $500,000 of income earned; and 26.50% on income in excess of $500,000 (as of 2020). These corporate tax rates are significantly less than the 2020 highest marginal tax rate of 53.53% in Ontario on employment or self-employed income.
A T2 income tax return must be filed for your PREC.
You should consult with a professional advisor regarding transferring the assets related to the real estate endeavour to the PREC, such as goodwill, client list, contacts, computer, vehicle, other tangible and intangible assets. The transfer can be structured on a tax-free basis through a section 85 rollover.
What are the advantages?
Some advantages of setting up a PREC are:
A lower corporate tax rate if your personal marginal tax rate is higher than 12.2% on income that you do not need to spend for your upkeep and maintenance.
Tax deferral opportunities if you do not need to spend all the income.
If structured properly, the potential for income splitting with family members who made adequate contributions to the business. (Caution: TOSI rules should be considered)
What are the disadvantages?
Some disadvantages of setting up a PREC are:
The fees associated with incorporation.
Increased yearly accounting fees for corporate filings.
Strict provincial compliance regulations.
Additional information about the advantages and disadvantages of incorporation can be found in our previous article “To incorporate or not?”
If you have any questions or comments about this blog post, please feel free to contact us.
Disclosure
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