As of October 1, 2020, a new Ontario regulation 536/20 came into force. Personal Real Estate Corporations (PREC) have been Allowed in Ontario. From now on, Ontario Realtors are permitted to earn income through a professional incorporation as some other provinces, including British Columbia, Nova Scotia and Manitoba. Full details on PRECs are found on the Ontario Regulation.
PREC may not be recommended for every realtor or broker because each one has a different financial situation.
ADVANTAGES OF PREC
- Income tax saving & deferral:
Corporate tax rate is subject to 12.20% (year 2020) on the first $500,000 of income earned in PREC vs. personal tax rate 53.53% if income is higher than $220,000 in year 2020 without PREC.
- Income splitting:
Since non-equity share of the corporation can be legally and beneficially owned by family members (spouse, child and parent) of the controlling shareholder (broker or salesperson), dividends are allowed to be paid among family members with lower income to reduce tax payment. Of course, be aware of TOSI rules (Tax On Split Income).
- Flexible tax planning:
Instead of cashing out all of the money you make within one year, you can have more options. Excess funds in the PREC can be used to purchase investment, life insurance or an Individual Pension Plan.
DISADVANTAGES OF PREC
- Higher fees on bookkeeping & tax filing:
Because PREC is a separate entity, you need to have appropriate accounting records and stricter compliance with CRA to meet filing requirement, such as payroll remittance, HST return and corporate tax return.
- Higher fees on legal cost:
Including article of incorporation, annual minutes and other filings required by the Ontario Business Corporations Act.
In summary, despite all of the disadvantages, realtors or brokers can take advantages from PREC if they can leave some earnings in the company. Otherwise, we don’t suggest you to register PREC, at least at this moment.