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Incorporation Of Real Estate Agents: Canadian Tax Lawyer Perspective – Tax – Canada – Mondaq News Alerts

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Recent Updates to the Law Allow Incorporation for Real Estate
Agents

On October 1, 2020, Ontario Regulation 536/200 updated the
Real Estate and Business Brokers Act to allow real estate
agents to incorporate. Real estate agents who wish to incorporate
are limited to forming a particular type of corporation called a
“Personal Real Estate Corporation” (PREC). Creating and
operating this type of corporation involves certain requirements
not imposed on other corporations. These requirements will be
discussed in further detail below, along with the tax and legal
benefits of forming a PREC.

The Trust in Real Estate Services Act received royal
assent in March of 2020. Once this Act comes into force, the
Real Estate and Business Brokers Act will be retitled the
Trust in Real Estate Services Act.

Unique Regulations Applicable to Personal Real Estate
Corporation

Corporations formed in Canada or a particular province must
comply with the relevant requirements of the law under which they
are incorporating. For corporations related to a particular
profession, such as medical corporations and professional
corporations for lawyers, must also abide by the requirements of
the particular law or regulation which allows those professionals
to incorporate. The same applies to PRECs.

The following are the requirements applicable to PRECs:

  • Must be incorporated under the Business Corporations
    Act
    . This is Ontario’s Corporations Act. PRECs must act in
    compliance with the incorporation requirements under that Act.
  • The controlling shareholder must be a broker or salesperson
    registered with the Real Estate Council of Ontario (RECO). A PREC
    is not required to independently register with RECO as long as the
    controlling shareholder is an existing RECO registrant.
  • The controlling shareholder of the PREC must also be the
    PREC’s sole director and officer.
  • There must be no agreement or arrangement that limits the
    controlling shareholder and sole director’s ability to manage
    or supervise the PREC.
  • The controlling shareholder must directly or indirectly legally
    and beneficially own all equity shares in the PREC. These equity
    shares are the only shares of the PREC with voting rights.
  • Non-voting or non-equity shares of the PREC can be owned
    legally and/or beneficially either directly or indirectly by the
    controlling shareholder or his or her parents, spouse or
    children.
  • The PREC cannot trade real estate, except where employed by a
    broker.

Tax Benefits of Incorporating a Personal Real Estate
Corporation

The new ability for real estate agents to incorporate PRECs
makes available the numerous tax benefits of operating a business
through a corporation. These include lower tax rates, deferrals,
income splitting and tax planning opportunities.

Corporations are taxed at a lower tax rate on active business
income than individual taxpayers, and depending on their income,
can take advantage of the small business deduction. A corporation
can retain the money it earns for furthering the business or
investment purposes for as long as it is in operation. This defers
adding the income of the PREC to the reported income of the real
estate agent for as long as is advantageous and appropriate.
However Canadian controlled private corporations (CCPCs) that earn
passive investment income in excess of $50,000 will not be able to
claim the full small business deduction. The exact decrease to the
small business deduction depends on the amount of passive
investment income earned by the CCPC. Once the money is removed
from the corporation, such as by way of a dividend or salary, the
taxpayer receiving the funds will pay tax on the funds at his or
her tax rate. Corporate tax rules, specifically the dividend tax
credit, prevent this resulting in double taxation of both the
corporation and recipient of the funds and ensure the overall rate
of taxation is the same as if the money had been earned directly by
the individual.

Income splitting (or income sprinkling) is where income from one
taxpayer is attributed to the family member of that taxpayer.
Taxpayers participate in income splitting to take advantage of the
lower tax rate of certain family members while still making the
income available to the family. Since the PREC regulations allow
family members of the real estate agent to own shares in the PREC,
this creates income splitting opportunities. Recently, the Tax on Income Splitting (TOSI) rules were
expanded to further limit allowable income splitting. These rules
are beyond the scope of this article, but they are complex. Those
who wish to engage in income splitting are advised to first speak
to one of our Canadian tax lawyers.

The Lifetime Capital Gains Exemption or LCGE allows a taxpayer
to sell the shares of a qualifying small business corporation
without incurring tax up to the exemption limit which was $866,912
in 2019 and is increasing on an annual basis. This means
shareholders of the PREC are able to sell their shares in the PREC
tax-free if the lifetime capital gains exemption qualifying
conditions are met. However, the new shareholders of the PREC must
comply with the regulations described above or the corporation will
no longer be able to operate as a PREC.

Deferrals and income splitting create tax planning opportunities
for real estate agents who incorporate a PREC. For example, the
average taxpayer will enter a lower tax bracket upon retirement. If
the taxpayer is a real estate agent with a PREC, he or she could
defer withdrawal of the funds from the PREC until he or she enters
this lower tax bracket. This deferral results in lower tax on
income for the real estate agent.

A PREC additionally provides benefits for retirement planning,
as well as medical and dental benefits. An Individual Pension Plan
(“IPP”) can provide significantly higher contribution
rates than a Registered Retirement Savings Plan (“RRSP”)
and they permit registrants to make an additional one-time lump-sum
contribution. This means that if registrants are unable to
contribute to their IPP immediately, they can carry forward their
contribution room and make a one-time large lump-sum contribution
in the future when their earnings increase. A Health and Welfare
Trust (“HAWT”) (also referred to as a Health and Welfare
Plan) is a tax planning arrangement which allows
professional corporations to provide their employees with
reimbursements for medical and dental expenses. As a tax planning
benefit, HAWTs allow deductibility of the contributions made to the
plan for the professional corporation.

Incorporating a PREC impacts contributions to the Canadian
Pension Plan (CPP) as well. As self-employed individuals, real
estate agents remit both the employer and employee portion of the
CPP. A real estate agent who operates a PREC could cause the
corporation to issue him or herself a dividend instead of a salary.
This would remove the requirement to remit the CPP payments on the
real estate agent’s renumeration. Choosing a dividend instead
of salary though may impact the real estate agent’s ability to
engage in other retirement planning such as making RRSP
contributions.

Tax and Cost Negatives of Incorporating a Personal Real Estate
Corporation

Once a real estate agent incorporates a PREC that corporation is
a legally separate person from the real estate agent. This can
create certain benefits, but depending on the real estate agent and
PREC’s particular circumstances, it may also create
disadvantages which make incorporation of a PREC less
desirable.

The main downside of incorporating a PREC is the additional
administrative costs. As a separate person, the PREC will need to
maintain its own accounting and records, have its own GST/HST
registration, file its own taxes and make all necessary corporate
filings. These administrative costs may outweigh the benefits
enumerated above but generally do not.

Incorporating a PREC may additionally prevent the real estate
agent from using a powerful tax tool – losses. When a taxpayer
incurs a loss, that taxpayer can use the loss to decrease the
amount of tax owing. If the taxpayer cannot utilize the entirety of
that loss in the tax year it is earned, the taxpayer can carry that
loss forwarded or backwards to decrease the tax owing in
surrounding tax years. How many years a loss can be carried over
depends on the nature of the loss. These different types of losses
can also only be used to decrease related types of income. Once
incorporated though, any losses incurred by the PREC belong solely
to the PREC. The real estate agent cannot employ the PREC’s
losses to decrease his or her personal taxes. Although losses will
be available to reduce past or future corporate earnings.

Even though the PREC is a legally separate person, real estate
agents should be aware they can still be held liable for the
actions of the PREC under the Excise Tax Act and
Income Tax Act. In particular, director’s liability
provisions allow the Canada Revenue Agency to pursue the director
of a corporation for the unremitted payroll taxes and GST/HST of
the corporation. Since the real estate agent must be the PREC’s
sole director, that person can be held liable for the PREC’s
non-compliance with its payroll tax and GST/HST obligations. Similarly, operating as a
PREC does not shield the real estate agent from potential personal
liability for his or her provision of real estate services. A real
estate agent cannot utilize a PREC to avoid his or her professional
liability.

Pro Tax Tips: Identifying Whether a PREC is Advantageous

Though PRECs are now available for real estate agents, real
estate agents should not rush to file for incorporation. Creating a
corporation without understanding the particular rules applicable
to corporations or whether it is advantageous to incorporate in
your particular circumstances could cause you to miss out on tax
savings or incur unnecessary costs. Real estate agents considering
incorporating a PREC should speak to one of our experienced
Canadian tax lawyers to fully understand the benefits of the PREC
and whether a PREC would be beneficial in his or her
circumstances.

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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Booming real estate market reaches rural N.S. – CBC.ca

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Realtors in rural Nova Scotia are adjusting quickly to a new way of selling houses as buyers from places like Ontario and B.C. snap up properties without seeing them in person.

Christopher Snarby, the co-owner of Exit Realty Inter Lake, sells properties from Chester to Queens County and estimates he’s sold 12-15 of them sight unseen since May.

“People have been desperate and they can’t get here to see it, and they know things are moving quickly so they just kind of have to make a choice,” Snarby told CBC’s Information Morning on Monday.

“And not everybody’s comfortable with it, but certainly I’ve had a number that have been.”

He admits selling a property virtually can be a challenge. 

“It’s hard to describe a smell or feel of a house, but it really does become our responsibility to try to convey as much information as we can,” Snarby said. 

October was a record-breaking month for property sales across the province with inventory low and prices continuing to soar, according to the Nova Scotia Association of Realtors.

Bobbi Maxwell said half of her buyers right now are from outside the province and won’t see their houses in person until they arrive. Most are middle-aged people who can work from home and are looking for a place to retire at some point.

“We’re starting to see more people … migrate this way because they want the solitude, the peace, the quiet, the safety and the beauty of the beaches,” said Maxwell, a realtor with Viewpoint Realty Services who sells properties around Barrington and Clyde River in Shelburne County.

“We’re not as hot as the metro [market], but it’s definitely been one crazy market for us as well.” 

Record October across N.S.

The Nova Scotia Association of Realtors compiled data for the month of October that shows 1,427 units were sold across the province, up more than 30 per cent from October 2019.

The average sale price was a record $304,590, rising just over 21 per cent from the previous October. 

In Yarmouth, there were 24 residential sales in October, up 41 per cent from last year and in the Annapolis Valley, 203 properties were sold, up 30 per cent since last October. The average sale price also went up in both areas last month. 

Christopher Snarby, co-owner Exit Realty Interlake, said people are moving to communities on the South Shore for the relative affordability, friendliness and proximity to the ocean. (Robert Short/CBC)

On the South Shore where Snarby works, sales in October were up about 30 per cent from last year and the average residential price was just over $291,000, an increase of 36 per cent over last October. 

The booming market is a major win for sellers but can be frustrating for buyers

“We’re not usually accustomed to that many bidding wars in our area, but now … most properties have gone into at least two or three offers and the time frames are a lot quicker as well,” Snarby said.

In the past, houses would sit on the market for six months to a year and now they’re gone in weeks or days, he added.

Rural internet still a challenge

Even though people are eager to move to Nova Scotia for its friendliness and relative affordability, Snarby and Maxwell said they are routinely asked about internet service.

“It’s really funny because people are more concerned about the internet than they are health-care services,” Maxwell said.

She said newcomers are good news for rural areas like Shelburne County that have struggled with out-migration. 

Bobbi Maxwell hopes the tide is turning for communities like Shelburne, which have seen an out-migration of residents in recent years. (Robert Short/CBC)

But she said there could be challenges, too. 

Many new buyers say they eventually want to build their own homes but finding skilled labour in the area isn’t always easy, she said. 

“I think we’re going to have a lot of growing pains because with the demand, we’re very short on tradesmen like plumbers and electricians and carpenters,” Maxwell said.

“I really am hoping that a lot of the people who are moving here from away are bringing in new skills or new motivation to want to … become career oriented or focused and become tradesmen in our area.”

Snarby said some of his clients are selling homes in the $800,000 range in Ontario and buying a property in rural Nova Scotia for around $200,000, leaving a healthy amount for their retirement fund.

 “And at the end of the day, if they’re not comfortable with their house or if it’s not quite the right one, they can put it back on the market and there’s a good chance it’ll sell,” Snarby said. 

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Pandemic-induced demand for more space pushing up cottage prices, real estate firm says – CBC.ca

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Home prices are increasing in Canada’s cottage country as more buyers look to move there full-time, according to a report released Monday by Royal LePage.

Prices of single-family recreational homes rose 11.5 per cent to an aggregate of $453,046 in the first nine months of the year, the real estate brokerage said.

The data from Royal LePage comes amid an overall uptick in home prices this year, after COVID-19 lockdowns stymied the spring buying season.

A rush of demand and a limited supply as the economy reopened this summer and fall meant that home prices were up 15.2 per cent last month in Canada compared to a year ago, according to the Canadian Real Estate Association.

Royal LePage chief executive Phil Soper says the number of cottages, cabins, chalets and farmhouses on the market have also dwindled amid the increased demand, at least through September.

“Inventory levels are the lowest I’ve seen in 15 years,” said Heather FitzGerald, a Royal LePage agent in Moncton, NB, in the report.

While local buyers have moved away from cities and closer to nature, FitzGerald also noted an increase in buyers from Ontario and Quebec.

Corey Huskilson, another Royal LePage agent quoted in the report and based in Halifax, said buyers from outside of the Maritimes, “who expect to be working remotely for the foreseeable future, are flocking to the area.”

Real estate agents in 54 per cent of regions told the brokerage that there was a significant increase in buyers looking to work remotely at a cottage as a primary residence.

Eric Leger, a Laurentians-based agent, said in the report that Quebec’s lockdown periods “sparked an urgent desire for many city dwellers, in need of more living space, to relocate to the suburbs and cottage country.”

Retirees a factor, too

Agents in other provinces noted similar trends, with one agent noting that Alberta-based buyers are competing with people across the country for properties in Canmore.

“Highway developments have reduced the drive from Saskatoon to 1.5 hours, which makes working remotely more possible for those who still have to go into the office a few days a week,” said broker Lou Doderai in the report.

The report says retirees have also bid up cottage prices, with agents in 68 per cent of regions saying more retirees are buying cottages this year compared to last year.

“Retiring baby boomers have been putting upward pressure on prices and reducing inventory for the last few years. Retirees are now finding themselves competing against remote workers,” said Bob Clarke, an agent in Ontario’s Muskoka region, in the report.

“The most common question used to be ‘is the property West-facing?’ Now my clients’ biggest concern is internet quality.”

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Booming real estate market reaches rural N.S. – CBC.ca

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Realtors in rural Nova Scotia are adjusting quickly to a new way of selling houses as buyers from places like Ontario and B.C. snap up properties without seeing them in person.

Christopher Snarby, the co-owner of Exit Realty Inter Lake, sells properties from Chester to Queens County and estimates he’s sold 12-15 of them sight unseen since May.

“People have been desperate and they can’t get here to see it, and they know things are moving quickly so they just kind of have to make a choice,” Snarby told CBC’s Information Morning on Monday.

“And not everybody’s comfortable with it, but certainly I’ve had a number that have been.”

He admits selling a property virtually can be a challenge. 

“It’s hard to describe a smell or feel of a house, but it really does become our responsibility to try to convey as much information as we can,” Snarby said. 

October was a record-breaking month for property sales across the province with inventory low and prices continuing to soar, according to the Nova Scotia Association of Realtors.

Bobbi Maxwell said half of her buyers right now are from outside the province and won’t see their houses in person until they arrive. Most are middle-aged people who can work from home and are looking for a place to retire at some point.

“We’re starting to see more people … migrate this way because they want the solitude, the peace, the quiet, the safety and the beauty of the beaches,” said Maxwell, a realtor with Viewpoint Realty Services who sells properties around Barrington and Clyde River in Shelburne County.

“We’re not as hot as the metro [market], but it’s definitely been one crazy market for us as well.” 

Record October across N.S.

The Nova Scotia Association of Realtors compiled data for the month of October that shows 1,427 units were sold across the province, up more than 30 per cent from October 2019.

The average sale price was a record $304,590, rising just over 21 per cent from the previous October. 

In Yarmouth, there were 24 residential sales in October, up 41 per cent from last year and in the Annapolis Valley, 203 properties were sold, up 30 per cent since last October. The average sale price also went up in both areas last month. 

Christopher Snarby, co-owner Exit Realty Interlake, said people are moving to communities on the South Shore for the relative affordability, friendliness and proximity to the ocean. (Robert Short/CBC)

On the South Shore where Snarby works, sales in October were up about 30 per cent from last year and the average residential price was just over $291,000, an increase of 36 per cent over last October. 

The booming market is a major win for sellers but can be frustrating for buyers

“We’re not usually accustomed to that many bidding wars in our area, but now … most properties have gone into at least two or three offers and the time frames are a lot quicker as well,” Snarby said.

In the past, houses would sit on the market for six months to a year and now they’re gone in weeks or days, he added.

Rural internet still a challenge

Even though people are eager to move to Nova Scotia for its friendliness and relative affordability, Snarby and Maxwell said they are routinely asked about internet service.

“It’s really funny because people are more concerned about the internet than they are health-care services,” Maxwell said.

She said newcomers are good news for rural areas like Shelburne County that have struggled with out-migration. 

Bobbi Maxwell hopes the tide is turning for communities like Shelburne, which have seen an out-migration of residents in recent years. (Robert Short/CBC)

But she said there could be challenges, too. 

Many new buyers say they eventually want to build their own homes but finding skilled labour in the area isn’t always easy, she said. 

“I think we’re going to have a lot of growing pains because with the demand, we’re very short on tradesmen like plumbers and electricians and carpenters,” Maxwell said.

“I really am hoping that a lot of the people who are moving here from away are bringing in new skills or new motivation to want to … become career oriented or focused and become tradesmen in our area.”

Snarby said some of his clients are selling homes in the $800,000 range in Ontario and buying a property in rural Nova Scotia for around $200,000, leaving a healthy amount for their retirement fund.

 “And at the end of the day, if they’re not comfortable with their house or if it’s not quite the right one, they can put it back on the market and there’s a good chance it’ll sell,” Snarby said. 

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