Approximately 15 years ago, a change took place in the ability of Ontario’s doctors to manage their income. For the first time, they were allowed to incorporate.
This was significant because it fundamentally changed the relationship between doctors and financial management. Now, they were able to take advantage of the lower tax rates, deferrals, and income splitting formerly available only to the more standard incorporated businesses.
As it stands, this is an advantage afforded to many regulated professionals in Ontario, including architects, accountants, lawyers, and engineers; and this is a benefit that the real estate industry has long lobbied for.
In fact, as it stands, legislation to allow incorporation in the real estate sector was first introduced in 2008. However it failed to pass twice due to the proroguing of legislature.
Now, however, Bill 104, the Tax Fairness for Realtors Act, has passed both First and Second Reading (as of March 2017). A Third Reading will take place in the near future pursuant to any recommended amendments by the Standing Committee on General Government, after which it is voted on for approval and, if passed, eventually becomes law.
All in all, the future of incorporation in the real estate industry looks very promising. So what does this mean for the real estate agents out there?
First and foremost, to qualify as a Personal Real Estate Corporation (PREC) the agent must have the prescribed qualifications to be registered as a salesperson or broker. Moreover, that agent (now the corporation) must be registered with a brokerage to trade in real estate.
With that met, the financial planning benefits are several.
Better Tax Rates:
In Ontario, the top marginal rate is 53.53% on income over $220,000. As a PREC, real estate agents would have access to the Ontario small business tax rate of 15% on the first $500,000 of taxable income, provided of course that they are a Canadian Controlled Private Corporation. Income in excess of $500,000 would then be taxed at 26.5%. This means that through incorporation there is an opportunity for real estate agents to reduce their tax burden by up to 38.53%.
Tax Deferral Opportunities:
The opportunity in the lower corporate tax rate of 15% is compounded when we take into consideration the opportunity to defer payment of tax on a portion of income altogether. Incorporated, real estate agents will now have the formerly unavailable opportunity to leave a portion of their profits in the business, meaning that they will be able to defer payment of taxes on that income until that money is withdrawn.
Income Splitting Opportunities:
Income splitting is a process that allows corporations to split that organization’s income across family members by paying them a reasonable salary or issuing dividends. This last is a proposition within Bill 104 that would allow for the issuance of non-equity shares to the family members of the realtor.
Now, as with any such adjustment, the process of incorporation is not without its challenges. Record keeping and filing requirements, for instance, are far more stringent for corporations. With incorporating, there are set-up costs and annual maintenance costs that need be paid by corporations. There are also indirect taxes, such as those surrounding payroll, WSIB, Employer Health Tax, and GST/HST on commissions earned, all of which add additional complexity.
Another consideration to take into account is that it is not yet clear whether the incorporated real estate agent will be considered to be operating a Personal Service Business (PSB). PSBs are not eligible for the small business tax rate, and are limited in terms of expense deductions. This means that if the new incorporated realtor is considered to be a PSB, the opportunity to reduce their tax burden will be far less significant.
At the end of the day, incorporation for real estate agents is a powerful evolution in an industry that, at least in this respect, is playing catch-up to other regulated professions. Once passed, Bill 104 will provide a powerful advantage to real estate agents looking to maximize their income through the new financial management tools the Bill will make available to them.
Until Bill 104 passes into law, there will still be questions surrounding exactly how it will be implemented and what that will mean for real estate agents. Yet, any form of the Bill that moves real estate agents to a position to incorporate is one that should be seen as a win for the real estate industry, and an opportunity to take advantage of by Ontario realtors.
By: Joe Figliomeni, CPA, CA
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.