Personal Real Estate Corporations Part Two: Implications and Tax Incentives
Since the passing of the Trust in Real Estate Services Act, 2020 (“TRESA”) in October, licensed real estate salespersons and real estate brokers (“Agents”) have been able to imagine new possibilities for growth. The implementation of TRESA, allowing Agents to incorporate their business as Personal Real Estate Corporations (“PRECs”), providing Agents with appealing tax incentives and investment opportunities.
TAX INCENTIVES FOR INCORPORATING YOUR PREC
Before Agents decide to incorporate, they will need to evaluate whether PRECs are the right avenue for their personal and financial future. Though PRECs offer some alluring tax advantages, there is every possibility that your business does not necessitate incorporation. In fact, if you do not meet certain financial requirements, incorporating could hinder your economic development.
Agents that find themselves with excess cash at the end of each fiscal year may benefit from this new opportunity. But, ultimately, tax incentives and profits from your PREC are only advantageous for Agents bringing in excesses of $100,000 net income annually. Whether you considered saving for your retirement, growing your professional prospects, or selling your business in the future, incorporating your business can help you achieve your goals.
Retained Earnings and Passive Investments
PRECs allow you to re-invest retained earnings, or passive income, inside and outside your corporation. For instance, excess funds can be used to hire employees, invest in advertisement opportunities, and/or purchase shares in another corporation, rental properties, or life insurance (“Passive Investments”). Further, a well-planned estate plan may allow for the transfer of ownership of the PREC to beneficiaries without encountering estate administration taxes. Contact us for more information and help setting up your Estate Plan.
Interestingly, though Passive Investments do not necessarily affect federal corporate tax rates, they can impact your ability to obtain Ontario’s Small Business Deduction when income levels reach in excess of $50,000. These “grinding” rules can lead to higher tax rates of 18.2% which, objectively, is still a marked improvement from 53%.
For self-employed Agents, PRECs provide more flexibility by allowing you to pay yourself by way of salary and/or dividends; however, note that funds drawn from the PREC in these forms may be subject to your personal income tax rates described above. Though a personal salary obtained from your PREC will likely be subject to Canada Pension Plan (“CPP”) contributions, such annual costs are not required for funds drawn in the form of dividends, specifically when in conjunction with a formal retirement plan. Further, Agents should keep in mind that receiving a salary and T4 can be advantageous as well, providing stability for your financial future and making it substantially easier to qualify for a mortgage.