Incorporation for Real Estate Agents
In Ontario, incorporation is afforded to many regulated professionals including doctors, lawyers, architects, engineers, and accountants. Real estate agents, however, are currently prevented by the Real Estate and Business Brokers Act (REBBA) from incorporating.
In an effort to “create a stronger business environment”, the Ontario government introduced Bill 145, the Trust in Real Estate Services Act, in November 2019, which, if passed, would amend the REBBA to allow real estate professionals to incorporate and, therefore, potentially benefit from lower tax rates, tax deferrals, income splitting opportunities, and transfers of assets.
Lower Tax Rates
Real estate professionals are currently taxed on all self-employed income at personal tax rates, which are typically higher than corporate rates, leaving fewer available resources for things like advertising, hiring employees, and investing.
In Ontario, the Small Business Deduction allows up to $500,000.00 of active business income to be taxed at the corporate rate of 3.2% for 2020. Income in excess of the small business limit would be taxed at the general corporate rate of 11.5%. In contrast, the highest personal tax rate is 53.53%. (Note: There are limitations to accessing the small business deduction when a business earns passive income (i.e. from investments) in excess of $50,000.00 in its prior year.)
Real estate agents would only be taxed personally for the money paid out from the corporation, such as on dividends (where the corporation could then take advantage of the dividend tax credit) and on salaries (the payment of which would reduce the corporation’s income tax).
Opportunities for Income Splitting
A corporation can pay a reasonable salary to employed family members for services provided, which would be a deductible expense for the corporation. Family members may also become shareholders of the corporation, subject to tax rules.
Transfer of Assets
Any asset that a real estate agent owns personally can be transferred into the corporation, and funds can be withdrawn from the corporation tax-free up to a certain amount as a result of the transfer.
Although incorporation comes with a variety of potential benefits, it is also important to consider the extra compliance requirements and administrative costs that come with incorporating such as filing a separate tax return for the corporation; maintaining accounting records and producing annual financial statements (which means potentially hiring an accountant); payroll remittances and Employer Health Tax and Workplace Safety and Insurance Board requirements for any employees; as well as legal costs associated with incorporating, preparing annual minutes and other filings required by the Business Corporations Act (Ontario), 1990.
As Bill 145 has only recently been introduced, real estate professionals should stay tuned for further news on the status of its passage. Further details can be found by visiting the news section of the Ontario Government or by viewing the bill from the Legislative Assembly of Ontario.