In an effort to “create a stronger business environment”, the Ontario government passed Bill 145, the Trust in Real Estate Services Act, in March 2020, which amended the Real Estate and Business Brokers Act to allow real estate professionals to incorporate and, therefore, benefit from lower tax rates, tax deferrals, income splitting opportunities and transfers of assets.
Lower tax rates
Real estate professionals were previously 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.
Now, real estate professionals in Ontario who incorporate can take advantage of the Small Business Deduction, which 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.)
Incorporated 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Any asset that a real estate agent owns personally can be transferred into their corporation, and funds can be withdrawn from the corporation tax-free up to a certain amount as a result of the transfer.
Incorporation comes with a variety of potential benefits, but it is important to be aware of 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).
Regulations supporting the Trust in Real Estate Services Act have not yet been released. 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.