Personal?real estate corporations
The Real Estate Services Act in BC allows real estate professionals to incorporate their practice. This allows real estate agents to take advantage of the tax planning opportunities that are available to other self employed professionals (doctors, dentists, etc).
PRECs and tax savings
Lower income tax rate
In BC, unincorporated real estate agents (and individuals in general) pay income tax based on a marginal tax system. What this means is at lower incomes, realtors pay lower tax, but the rates increase gradually, with the top marginal tax rate for an unincorporated real estate agent set at almost 45%. A real estate agent earning $150,000 will subsequently pay more than $50,000 of that in income tax (& CPP), while an agent earning $200,000 will pay close to $75,000. A personal real estate corporation (PREC) on the other hand only pays 13.5% of income tax on up to $500,000 of commission income retained in the company. This means that by retaining income in the personal real estate corporation, the realtor earning $150,000 can save almost $30,000 per year.
Unincorporated sales agents are forced to collect their income on each sale of a property. This often results in high personal income one year and low personal income in another year. In a high income year, once an agent earns more than approximately $105,000, the agent will be paying close to 45% in income tax on each additional dollar earned. Incorporating allows the realtor to delay receiving personal income. ?In high income years, the professional corporation can pay out what is needed to the agent; then, the rest can be retained in the corporation for low income years.
This deferral of income tax is only available to incorporated agents; unincorporated agents do not have the option to defer.
Generally speaking, when a real estate agent makes more than needed, incorporating will allow them to make significant tax savings, which for some agents can easily amount to over $25,000 per year.
You can also shift the after-tax dollars in the corporation to a holding corporation free of tax.? This income can then be invested into other things, and since there will be more after tax dollars left to invest, the return on such an investment will also be higher.
The other tax advantage of incorporating your real estate practice is income splitting. Once again, due to the marginal income tax system in Canada, by shifting income from a person earning a high income to a person earning a lower or no income (such as a spouse or adult child), a real estate agent can save a significant amount of income tax .? This means by incorporating, even if the family needs all of the income earned in the corporation, income splitting can allow for a much lower overall tax burden. In some cases, an individual receiving an income from the corporation will pay no tax at all.
In the top tax bracket, you will have to earn almost $40,000 in order for you to give $22,000 to your spouse or adult children. However, by splitting your income with your adult family members not earning any income, you will only need to make about $25,000 to give the $22,000. This is equivalent to a tax saving of about $15,000!
Costs associated with incorporation
Incorporating your real estate practice adds a layer of complexity; as a result, it also adds a few extra costs. In addition to paying the one time incorporation fee, you will also need to pay another set of license fees, E & O fees , and compensation fund fees to the real estate council of BC. Finally, as a result of the additional complexity, your accounting fee will also increase.? It is very import to make sure that a Personal Real Estate Corporation makes sense in your situation.
The benefit of forming a PREC?can be quite significant; however, incorporation is not designed for every realtor. It is very important to consult with an accountant before deciding to incorporate or, as to which corporate structure should be used with your unique situation. For more information with regards to PREC?s or to see if incorporation is right for your professional practice, please call or email me.
Gurdit Mann, CPA,CGA