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Incorporation For Real Estate Professionals – Real Estate and Construction – Canada – Mondaq News Alerts

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Accountants, engineers, lawyers, doctors, dentists.  Now
real estate professionals join the Ontario regulated professionals
who are able to personally incorporate their business. 
Following several other provinces,1
on October 1 2020, the Ontario government passed O/Reg 536/20:
Personal Real Estate Corporations, under the Real Estate and
Business Brokers Act, 2002,
which provides that real estate
salespeople and brokers may incorporate in Ontario. Incorporation
allows a real estate professional to have their self-employed
revenue paid directly into their personal real estate corporation
(“PREC“), offering some tax
advantages.

Tax Advantage

The key tax advantage of incorporation is that income earned in
a PREC is taxed at the corporate tax rate, which is substantially
lower than the personal tax rate.

In Ontario the combined federal and provincial corporate tax
rate is 12.5% on the first $500,000 of active business income (a
threshold amount that is shared among associated corporations), and
26.5% on income above that threshold. In contrast, the highest
personal tax rate is 53.52% on income over $220,000. As a result,
when income is retained in a PREC and taxed at the corporate rate,
a greater amount of money is available for investment. 

For example, if a real estate professional earned $500,000 in a
year, without a corporation the professional would have
approximately $266,344 of after tax income that could be invested.
In contrast, making use of a PREC, the same income would result in
approximately $437,500 of funds available for investment within the
corporation.

This may increase the investment growth and allow an investment
portfolio or a retirement portfolio to grow more quickly, keeping
in mind that within the corporation the investment income itself
will likely be taxed a higher rate than the active business
income.

An additional tax advantage is that the real estate professional
can distribute their career earnings over their lifetime. 
Rather than pay the highest personal tax rate in peak earning
years, the real estate professional can extract income from the
corporation in leaner years, or in retirement, at a lower marginal
tax rate.  For example:

1035270a.jpg

As the chart indicates, using a PREC allows a real estate
professional to distribute income earned over multiple years, in
turn allowing the professional to access lower marginal tax
rates.  This can reduce the total amount of taxes paid over a
lifetime.

Life Insurance

A further benefit offered by a PREC is that life insurance for
the controlling shareholder can be held within the corporation,
reducing the amount of pre-tax earnings required to cover the
premiums. In addition, life insurance benefits, less the adjusted
cost base of the policy, are credited to a corporation’s
capital dividend account (“CDA“) and can
be extracted from a corporation free of tax. The reduction of the
credit to the CDA by the policy’s adjusted cost base is
intended to offset the advantage of paying insurance premiums with
corporate income, instead of personal income taxed a personal tax
rates. Real estate professionals considering having a PREC purchase
life insurance should also note that in most cases the PREC will
not be entitled to deduct the expense of the insurance
premiums.

Income Splitting

The 2017 amendments to the Income Tax Act introduced the tax on
split income rules, know as “TOSI”, which have
significantly curtailed the ability of professionals to use
professional corporations to split their income with low earning
family members. Previously, professionals could pay dividends from
their corporations to family members with low income, allowing the
family to benefit from the lower tax rate applicable to the
professional’s spouse or children.  The TOSI rules now
require that in order for corporate dividends to be taxed in the
hands of a lower earning family member, that family member must be
actively engaged in the professional’s business, meaning, for
example, that the family member works in the business at least an
average of twenty hours per week.

Restrictions

A PREC can limit a controlling shareholder from standard
corporate financial liabilities. However, a PREC does not limit
professional liability, which is governed by the Real Estate
Council of Ontario pursuant to the Real Estate and Business
Brokers Act, 2002.

In addition, like other professional corporations, PRECs are
subject to restrictions.  In particular, all of the equity
shares of a PREC must be held directly or indirectly by the
controlling shareholder, being an individual salesperson or broker
registered with the Real Estate Council of Ontario;2 the controlling shareholder must be
employed by a brokerage; the controlling shareholder, must be the
sole director and officer of the corporation;3 and family members of the registrant
can only hold non-voting and non-equity shares of the
corporation.

Conclusion

Given the current “heat” of the Toronto real estate
market, incorporation may be an attractive option for real estate
agents or brokers.  However, unless a real estate professional
is earning substantially more than their everyday expenses,
incorporation may not be beneficial.  Additionally, real
estate professionals should take the TOSI rules into account when
deciding whether or not to incorporate. Anyone considering
establishing a PREC should consult with their tax professionals for
specific advice. 

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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RBC Adds Two “Severe” Risk Scenarios, Including Canadian Real Estate

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Risk models from Canada’s largest bank shows a wider range of uncertainty for real estate. RBC’s latest models, shared with analysts this week, shows a general forecasted improvement. The downside hasn’t changed much, indicating a little more uncertainty. They also shared they are considering two new and “more severe” scenarios for energy and real estate. These downsides reflect the potential for a double-dip recession.

Macroeconomic Scenario Assumptions

Feel free to skip this if you’re familiar with IFRS 9 macroeconomic assumptions. For the rest of you folks, it’s a reporting standard used by most of the world’s banks at this time. One part of it requires assessing risk using unbiased, and possible outcomes. Typically you’ll see reports divided into three areas – base, best, and worst case scenarios.

The base, best, and worst case scenarios are exactly what they sound like. The base is what the organization will plan with, assuming things go along as they currently are. The best case scenario is if every banker’s wet dream comes true, and the economy is perfect. The worst case scenario is if every banker’s nightmare comes to reality, and it’s the worst realistic case. The organization needs to be ready for each of these scenarios.

The forecasts are used to prepare the organization for risk, so it’s important to be realistic. Too optimistic, and just a few hiccups can result in serious damage. Too negative, and they’ll be putting aside way too much capital, slowing the growth of the company. These aren’t just random numbers, but they’re considered reasonable outcomes. That said, let’s look at these scenarios.

RBC’s Base Case Shows Real Estate Rising 5%

Canada’s largest bank is more positive about the base case than they were last quarter. The base case forecasts prices will rise 4.9% over the next 12 months, from January 31, 2021. Compound annual growth of 4.5% is forecasted for the following 2 to 5 years.

RBC’s Canadian Real Estate Risk Scenarios

RBC’s macroeconomic scenario assumptions for Canadian real estate prices under various risk scenarios. Source: RBC, CREA, Better Dwelling.

This is a fairly big jump from the previous quarter. Last quarter, they were only forecasting an 0.6% increase over the next year. The market would see compound annual growth of 4.5% for the following 2 to 5 years. A more positive base case is typically a good thing. However, it may mean more uncertainty right now. We’ll circle back to this in a few seconds.

RBC’s Best Case Sees Real Estate Rising 8%

The best case scenario got small upwards movement, but it was still pretty big. The best case forecasts prices will rise 8% over the next 12 months. Compound annual growth of 11.1% follows for the next 2 to 5 years.

This quarter’s forecast is a big improvement short-term, but the same long-term. The previous quarter saw prices growing two points lower in the twelve month period. The following 2 to 5 years would see compound annual growth remain the same. Just so we’re clear on how optimistic this is, it would mean prices double every 7 years. That’s about as likely as getting a full-size downturn.

RBC Worst Case Sees Real Estate Falling Up To 30%

The worst case scenario for the next year remains the same, but the following years improve slightly. In the worst case, prices would fall 29.6% in this scenario over the next 12 months. Compound annual growth of 4.5% over the 2 to 5 years that follow. The 12-month downside remains the same, while the following 2 to 5 years are now higher.

Circling back to the two “severe” worst case scenarios, with energy and/or real estate. The indicators are still in the range, but these would imply a double dip recession. This is when one recession occurs right after another, after a failed recovery. In this scenario, they expect the economy to “deteriorate from Q1 2022 levels for up to two years, followed by a recovery for the remainder of the period.” That is, after the 2 years of down turn, things will bounce back, and recover by the fifth year.

The biggest takeaway isn’t the upside or downside, but the spread between the two. If looked at by itself, the increased forecasts for the base and best cases look like a huge positive. When you realize the downside is the same as the old forecast, you realize this isn’t necessarily a positive revision. Wider ranges of forecasts tend to mean a bigger degree of uncertainty as to where things are heading.

Source:- Better Dwelling

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Corporate Real Estate Week set for mid March – REMI Network – Real Estate Management Industry Network

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Corporate executives and officers are encouraged to reflect on the role their in-house real estate teams play in supporting business operations and workforce productivity during Corporate Real Estate Week, March 15-19. CoreNet Global, the global association for corporate real estate professionals, has planned a slate of virtual seminars, presentations and networking events tied to five different daily themes, and will also be releasing new studies and relevant data throughout the week.

“The pandemic has forced a reckoning with remote and distributed work that corporate real estate professionals were well prepared for, and it will be up to our profession to chart the way forward after the crisis has ended,” says Angela Cain, CoreNet Global’s chief executive officer. “Corporate Real Estate Week will be both an acknowledgement of those contributions and an opportunity to think strategically about the return to the workplace.”

More than 11,000 CoreNet Global members in 50 countries have been grappling with COVID-19-triggered upheaval in corporate organizations’ space and facilities management needs over the past year. With key responsibilities for choosing sites, ensuring safe and healthy accommodations and overseeing building and technical support infrastructure, corporate real estate professionals have experienced a surge of new demands and pressures to facilitate remote work and ensure the well-being of staff within company facilities, as well as sudden shifting priorities for office locations.

Asked to reflect on these new circumstances in a survey CoreNet Global conducted last month, 88 per cent of respondents project that offices will now primarily accommodate team or collaborative tasks, while individual work moves off-site. Accordingly, they expect workers will spend less than half the work week in a traditional office setting with the remainder spent at home or occasionally at a co-working location. Thirty-six per cent foresee a 10 to 30 per cent cut in their organization’s real estate footprint within the next two years, while 16 per cent are looking for satellite hubs located closer to workers’ homes.

For this year, 58 per cent of survey respondents projected a return to 50 per cent office occupancy some time after June. Fewer than 9 per cent reported that their organizations would require workers to be vaccinated before they returned. However, more than three quarters indicated that workers would not be travelling internationally until at least later in the summer.

More than half of respondents affirm that more credence will be given to the host locale’s crisis readiness and potential vulnerabilities when choosing a site. The same number expect a retrenchment of employees from other global centres to their home countries.

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Vancouver real estate: new sales, listings below $350000 show pockets of affordability in expensive city – The Georgia Straight

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Everyone knows that homes are expensive in Vancouver.

It’s one of the most unaffordable places in the world, where many residences are priced in the millions of dollars.

That said, there are pockets of affordability that remain.

Recent listings and sales show that one can own a home, a condo to be precise, for less than $350,000.

One example is a condo unit downtown that Royal LePage Sterling Realty listed on February 22.

The second floor unit at the Sequel 138 condo development at 138 East Hastings is priced at $349,000.

Sequel 138 was built in 2014.

The one-bedroom, 443-square-foot property has a 2021 valuation of $334,000 as of July 1, 2020, based on figures from B.C. Assessment.

RBC’s mortgage calculator shows how much it costs to carry a $350,000 mortgage on a five-year term, with fixed-interest rate of 2.04 percent.

It comes up to a monthly payment of $1,488.85.

That’s cheaper than renting an almost comparable studio.

A check with rental information site PadMapper shows that a 500-square-foot studio at 1188 Bidwell Street in the West End is available for $2,290.

In East Vancouver, Nu Stream Realty Inc. sold a one-bedroom condo for $346,000.

Unit 207 at 6991 Victoria Drive measures 465 square feet.

The property was originally listed for $299,000. The price was later increased to $349,000. It sold on February 3 for $346,000.

Per B.C. Assessment’s valuation as of July 1, 2020, the Victoria Drive condo has a 2021 worth of $323,300.

The transactions were tracked by real-estate site Zealty.ca.

The online resource operated by Holywell Properties lists other examples of these listings and sales below $350,000.

One might even go up to a budget of below $450,000.

Again using RBC’s mortgage calculator, that means a monthly payment of $1,914.23.

That’s still cheaper than renting a $2,290 studio in the West End.

Below $450,000 can be considered affordable, according to realtor David Hutchinson.

“Even in a hot market like this, we can find affordability. You just have to know where to look,” Hutchinson told the Straight.

Nu Stream Realty Inc. sold Unit 207 at 6991 Victoria Drive for $346,000.

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