SHOULD A REALTOR INCORPORATE?

Understanding the Benefits of a Personal Real Estate Corporation (PREC)

A practical guide for Ontario Realtors considering incorporation

As your real estate business grows, one question often comes up: “Should I incorporate?”

For Ontario Realtors, a Personal Real Estate Corporation (PREC) can provide useful tax-planning and business-planning opportunities.

But incorporation isn't automatically a tax-saving strategy for every Realtor.

The real benefit depends on how much you earn, how much money you need personally, how much can remain in the corporation and your longer-term financial goals.

1. TAX DEFERRAL CAN BE A MAJOR BENEFIT

This is one of the most important concepts to understand.

If you earn all your commission personally, your taxable business income is generally reported on your personal tax return.

With an appropriately structured corporation, eligible income retained inside the corporation may initially be subject to corporate taxation rather than immediately being withdrawn and taxed personally.

THE KEY WORD IS “DEFERRAL.”

When money is eventually paid from the corporation to you personally, additional personal tax consequences may arise.

So incorporation doesn't mean your income becomes tax-free. It can potentially give you more control over when some income is withdrawn personally, subject to applicable tax rules.

2. YOU CAN LEAVE MONEY IN THE BUSINESS

Imagine a Realtor earns significantly more in a year than their family needs for personal living expenses.

If all that income is earned personally, it generally flows into that year's personal taxable income.

With a PREC, there may be an opportunity to retain some after-tax corporate funds rather than withdrawing everything personally.

Those retained funds can potentially support future business needs such as marketing, technology, staffing or other legitimate expenditures.

THIS IS WHERE INCORPORATION MAY BECOME MORE ATTRACTIVE FOR HIGHER-EARNING REALTORS WHO DON’T NEED TO WITHDRAW ALL OF THEIR EARNINGS PERSONALLY.

3. SALARY OR DIVIDENDS? THAT’S A PLANNING DECISION

Once incorporated, how you take money out of the corporation becomes important.

Depending on the circumstances, compensation may involve salary, dividends or a combination.

Each approach can have different implications involving personal taxes, CPP, RRSP contribution room and corporate taxation.

There isn't one compensation strategy that's right for every Realtor.

This is exactly the type of decision that should be reviewed with an accountant based on your income and financial objectives.

4. INCORPORATING DOESN’T TURN PERSONAL COSTS INTO BUSINESS EXPENSES

This misconception can cause trouble.

Creating a corporation doesn't mean vacations, personal vehicles, family meals or other personal purchases suddenly become deductible.

Business expenses still need to meet the applicable tax requirements.

A corporation can change how your business is structured. It doesn’t change a personal expense into a legitimate business expense.

Good bookkeeping becomes even more important once you incorporate.

5. A PREC COMES WITH COSTS AND RESPONSIBILITIES

Don't incorporate simply because another successful Realtor did.

A corporation brings additional administration.

There may be incorporation costs, annual corporate tax returns, bookkeeping, payroll or dividend documentation, corporate filings and professional accounting/legal fees.

If you're withdrawing virtually everything the corporation earns to cover personal expenses, the potential tax-deferral advantage may be much smaller.

THE BENEFITS HAVE TO BE WEIGHED AGAINST THE ADDED COST AND COMPLEXITY.

SO, WHEN SHOULD A REALTOR CONSIDER A PREC?

There isn't a magic commission number. Instead, ask:

• Am I consistently earning more than I need to withdraw personally?

• Can I leave meaningful funds inside the corporation?

• Am I building a long-term business rather than simply earning commission and spending it?

• Would the potential benefits justify the additional accounting and administrative costs?

Those questions are far more useful than simply asking, “How much tax will incorporation save me?”

A PREC ISN’T A TAX LOOPHOLE — IT’S A BUSINESS STRUCTURE.

Used properly, it may provide valuable tax-deferral and financial-planning opportunities. Used without a strategy, it can simply create more paperwork and expense.

Before incorporating, have your accountant and lawyer review your specific circumstances and the requirements applicable to a PREC.

DISCLAIMER

This article is for general informational purposes only and does not constitute accounting, tax or legal advice. Tax results vary depending on individual circumstances and applicable rules.

— Accounting & Tax Contributor