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Personal Real Estate Corporations: Ten Things Every Ontario Realtor Should Know

Overview

Toronto business lawyer, Antonio DiMinno, of DiMinno Rizzi Lawyers, provides Ontario realtors a basic overview of Personal Real Estate Corporations (PRECs) and the top ten things that they should know about them.

What is a Personal Real Estate Corporation?

A PREC is a special type of corporation for realtors in Ontario. It is a separate legal entity that is controlled solely by the realtor/salesperson. Realtors do the same things that they normally would, but provide their services under the corporation.

Personal Real Estate Corporations: The Top Ten Things Every Ontario Realtor Should Know

Using a Personal Real Estate Corporation unlocks tremendous tax planning advantages that can save you hundreds of thousands of dollars. Here are the top ten things you should know as a real estate salesperson:

1. Lower Tax Rate

PRECs enjoy a much lower tax rate than employees or unincorporated professionals. A PREC is taxed at around 12.2% on income up to $500,000 and 26.5% on income over $500,000. To compare, personal marginal tax rates are around 30% on income of $50,000; 43% on $100,000; 48% on $200,000; and 53% on income over $220,000.

2. More Money to Reinvest

A lower tax rate provides a realtor with more money to reinvest in their business, marketing, hiring employees, and expansion. It puts you on the fast lane to making more money!

3. A Powerful Retirement Tool

PRECs are a powerful retirement tool. Retained earnings can be invested into stocks, bonds, ETFs, mutual funds, GICS, and investment real estate. The small business limit of $500K that is taxed at 12.2% will be reduced by $5 for every $1 of investment income above a $50K threshold

4. Greater Income Stability 

A PREC provides incredible income stability. Money earned in higher income years can be shielded from tax and then withdrawn in lower income years or for leave of absences.

5. Protection from Personal Liability 

Incorporating protects your personal assets from most claims and lawsuits, such as those arising from commercial agreements. However, it does not protect you from professional misconduct.

6. Income Splitting

PRECs allow you to save further tax by income splitting with other family members. Family members must be actively involved in the business. An individual will be deemed to be actively engaged if the individual works in the business at least an average of 20 hours per week during the portion of the taxation year of the individual that the business operates or meets that requirement for any five prior years.

7. Lifetime Capital Gains Exemption

PRECSs give realtors a lifetime capital gains exemption of up to $892,218 on the increase of the value of the business. This can translate into hundreds of thousands of dollars in tax savings when you sell all or part of your business, or when you leave it as an inheritance. 

8. Additional Tax Deductions & Remuneration Structures

PRECs gives you access to additional tax deductions and remuneration structures. You should speak to an accountant familiar with PRECS to get a better understanding. 

9. Corporate Insurance Policies

As a realtor, you can obtain an insurance policy through the PREC for a fraction of the cost, and use it to protect you and your loved ones. Having a corporate insurance policy is also a powerful tax saving tool. Speak to your lawyer or accountant for more information.

10. Other Businesses

PRECs may be used to operate other businesses, saving you thousands in administration costs.

How an Ontario Business Lawyer Can Help

If you are considering incorporation, a great first step is to speak to a business lawyer familiar with Personal Real Estate Corporations.

Incorporating a PREC properly is a complex task. If done wrong, it could cost you far more than you imagined, especially if you are audited by the CRA or other government organization. More on this here.

A good business lawyer will work closely with you and your accountant to create a PREC for a reasonable fee.  You’ll likely make up that fee in saved taxes within the first year!

Contact us today for a free strategy session!

 

Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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