It has been a while since we created a blog entry that wasn’t focusing on some aspect of the Canadian real estate market, and we do enjoy sharing personal career tips for realtors from time to time here. So with that in mind we’re going to use today’s entry to discuss the merits of a move that many realtors make after they’ve built a solid footing with their career. That’s setting up a Personal Real Estate Corporation, and for some realtors this is indeed most beneficial with the way they can beginning their business income as a corporation.
Most of time these days when you see a realtor’s sale sign outside of a home you will see the realtor’s name with ‘personal real estate corporation’ or ‘PREC’ right below it. That means this realtors has established a PREC for their business and this is something that is possible in BC, Alberta, Saskatchewan, Manitoba, Quebec, Ontario, and Nova Scotia. And it is not only realtors who have this option, as many other types of professionals can make the same choice.
As mentioned, most realtors move to establish their PREC once they’ve well established themselves as a realtor working in that region. Getting to the point requires more than a few homes bought and sold, and for newer realtors who are struggling with getting to that point our online real estate lead generation system here at Real Estate Leads is an excellent resource that’s made available to realtors of any level of experience in the business. It puts you more directly in touch with people who are ready to make a move on real estate.
But enough about that for now, let’s look at the benefits of a personal real estate corporation for realtors and you can evaluate whether it will be the right fit for you. Keep in mind first that this arrangement won’t be a good fit for every realtors. Incorporation usually only makes real sense when they have an existing corporation with accumulated savings they wish to invest in real estate, or if the person is an investor who is looking to buy and sell real estate and will benefit from lower tax rates on this corporate business income.
Onto the advantages, and here they are:
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Income tax deferrals
One of the primary advantages to having their own PREC for a realtor is the ability to defer income tax. The tax rate on small business income up to $500,000 is usually upwards of 10% in any Province, and profit left in a PREC generally qualifies for this low tax rate. After-tax profits in a corporation can be paid out as a dividend. These payments will be at rates ranging from 0% up to 47.74%, based on the recipient’s other sources of annual income.
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Income splitting with family members
Licensed realtors in most of the provinces listed above can also name family members as shareholders of their PREC, but all of the voting shares of the company must remain with the realtor. Non-voting shares may be issued elsewhere, and with dividends paid to them as applicable. Under Tax on Split Income (TOSI) rules though, most dividends paid to family members will be considered split income and taxable at the top tax rate. This negates the benefits of income-splitting this way somewhat but for some realtors it is still a favourable arrangement.
That will be especially true if the realtor is over 65 and / or their spouse works more than 20 hours per week in the business annually. Further, if a realtor can establish a PREC with accumulated savings inside the corporation, they can be directed into stocks, bonds, GICs, mutual funds, or ETFs as investments, or even re invested into real estate.
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Tax Deductions
Most expenses that would be tax deductible for an unincorporated realtor who is operating as a sole proprietor will also apply for one who has incorporated themselves with a PREC. The corporation will not likely result in the ability to claim more tax deductions, but there can be exceptions to that too and you will want to be aware of them when weighing this type of decision.
First consideration is with the ability to set up a Health Spending Account (HSA). HSAs allow the reimbursement of an incorporated business owner for personally incurred medical expenses without withdrawals being classed as taxable income. The other exception is for corporate-paid retirement counseling as relates to ‘the fees you pay to provide services such as financial counseling or income tax preparation for an employee are usually considered a taxable benefit.’
Another consideration for you is that there is no avoiding some additional costs that you will assume with a PREC. Having a corporate lawyer get you through the process may cost anywhere from $1,000 to $3,000 and PRECs will have additional costs for bookkeeping and accounting that will be above a realtor’s current ones for those needs.
Should you set up a PREC? Tax deferral is primarily what draws realtors towards it, and then income splitting is the next big plus for those who can pay dividends from their PREC without being subject to applicable rules.
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