On November 19, 2019 the Ontario government introduced the Trust in Real Estate Services Act, 2019 in the legislature. If passed, it would update the rules that govern Ontario’s real estate salespersons, brokers and brokerages. The proposed legislation has five primary goals with the most notable being the ability for real estate agents to incorporate in Ontario.
From our perspective, one of the key goals is to allow real estate professionals to incorporate which is the reason for our comments herein.
Goals of legislation
Before discussing in more detail incorporating, we have highlighted below a summary of the five primary goals of the legislation:
- Improve consumer protection and choice in the market;
- Improve professionalism among real estate professionals;
- Update the powers available to Regulators to enhance compliance, address bad conduct and improve regulatory efficiency;
- Create a strong business environment by allowing real estate professionals to incorporate and by creating a specialist certification program (i.e. commercial real estate specialist program); and
- Bring legislation and regulations up-to-date and reduce regulatory burden.
There are several advantages to incorporating including access to corporate tax rates and income tax deferral opportunities as well as income splitting opportunities with family members active in the professional corporation.
Corporate Tax Rates and Deferral
In Ontario, the top marginal personal income tax rate is 53.53% on income over $220,000. The 2019 corporate tax rate is 12.5% on the first $500,000 of active income with any excess taxed at the general corporate rate of 26.5%. This means that through incorporation there is an opportunity for real estate agents to reduce their tax burden by up to 41%.
This reduction though is simply a tax deferral. Incorporated real estate professionals will have the opportunity to leave a portion of their profits in the business deferring payment of taxes on that income until the money is withdrawn by them. Previously agents would be taxed on their profits in the year at significantly higher marginal tax rates.
Income Splitting Opportunities
Income splitting allows corporations to split income amongst family members by paying them a reasonable salary or issuing dividends. Tax changes introduced by the Federal government in July of 2017 restrict the ability to split income across family members unless they are actively engaged in the business on a regular and continuous basis. This would apply to real estate professional corporations as well.
With incorporation comes additional compliance requirements. For instance, record keeping and filing requirements are far more stringent for corporations. Furthermore, there are set-up costs and annual maintenance costs that need to be paid by corporations. There are also indirect taxes, such as payroll withholdings, WSIB, Employer Health Tax, and GST/HST on commissions earned, all of which add additional complexity.
Regardless of the additional compliance measures, the proposed legislation is welcoming and a significant evolution in the industry. Once the bill is passed, it will provide a powerful advantage to real estate agents.
Is incorporating Recommended
Incorporation is not for everyone and each individual’s situation differs. A full review of an individual’s particular situation is required to assess whether incorporation is beneficial. Deciding whether or not to incorporate can be difficult given the advantages and disadvantages the structure provides
The introduction of this legislation is a big win for Ontario realtors as the province catches up to other regulated professionals. Until the legislation is officially passed, there will still be questions surrounding how it will be implemented. Stay tuned for future publications as information becomes available to us.
Please contact Fazzari + Partners LLP if you have any questions. We can offer the tax advice that best meets your unique circumstances.
The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.