To print this article, all you need is to be registered or login on Mondaq.com.
There have been many discussions recently about the ability for
real estate agents to now incorporate themselves, including a recent article penned by my colleagues. As
part of the discourse, it’s important to explore certain tax
benefits derived from Personal Real Estate Corporations
(“PRECs”). In this first part of a multi-article series,
I explore the ability to defer taxes by having a PREC retain all or
a portion of the income earned by the real estate agent.
In Ontario, the top marginal tax rate for income for individuals
is 53.53% in 2020. A PREC, however, may only have to pay up to
26.5% tax on such income in the first instance, while additional
tax is only owing when the individual takes that money out of the
PREC for his/her personal use. The different tax rates in the first
instance (53.53% to 26.5%) results in the ability to defer tax so
long as funds are retained in the PREC.
So, for example, if a real estate agent were earning $400,000
each year, he/she would be paying taxes in the aggregate of
~$180,000 (~45%) on such income. Every additional dollar of income
would attract 53.53 cents of tax. If, alternatively, he/she earned
that income in a PREC, taxes of up to only ~$105,000 would be owing
in the first instance. (Assuming the real estate agent has no other
sources of income, personal taxes in the amount of ~$78,000 would
be owing if the ~$295,000 was subsequently taken out of the PREC by
way of dividend.) Rather than paying the Canada Revenue Agency
immediately, the $75,000 of deferred taxes ($105,000 vs $180,000)
could be re-invested by the PREC.
The analysis doesn’t stop there. Many people rely on their
income to support their everyday living expenses. If the real
estate agent needs $220,000 to personally live off (i.e., the
aftertax income he/she was previously earning), the use of a PREC
would actually be detrimental to the agent. The aggregate tax paid
by the agent and the PREC in a year would exceed that which he/she
would have otherwise paid had he/she earned the income personally.
(The Canadian corporate tax system is based on perfect integration,
but the integration is never perfect and right now there is
over-integration, meaning more aggregate corporate and personal tax
is paid if all of the income earned by a corporation in a year is
distributed to its shareholder(s) in the same year. In the example
above, aggregate corporate and personal taxes of ~$183,000 would be
owing instead of the $180,000 if nothing had been done at all.)
But what if the agent only needed a portion of his/her income to
support his/her everyday living expenses? If, for example, he/she
only required $100,000 of after-tax income, he/she would only need
to receive a dividend in the amount of $110,000 from the $295,000
aftercorporate-tax dollars in the PREC, allowing him/her to retain
a significant portion of his/her income in the PREC and take
advantage of that lower corporate tax rate.
In conclusion, if a real estate agent doesn’t require any or
all of his/her annual income to fund his/her personal living
expenses, the use of a PREC can have a significant impact in terms
of personal finances. The other articles in this series will
discuss additional tax benefits associated with the use of a
PREC.
Originally Published by Minden Gross, December 2020
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.
POPULAR ARTICLES ON: Tax from Canada
