Category Archives: Canada

Incorporation for Real Estate Professionals

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:

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. 


[1] British Columbia  2008 – Real Estate Services Regulation – Real Estate Services Act

Saskatchewan – see, Section 5 The Professional Corporations Regulations, 2002 under the Professional Corporations Act.

Quebec see section 34.1 of Regulation respecting brokerage requirements, professional conduct of brokers and advertising under the Real Estate Brokerage Act.

[2] Subsection 2(2)

[3] Subsection 2(3) and 2(4)

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Indemnité de fin d’emploi : imposable ou non?

La question se pose régulièrement en matière d’indemnité de fin d’emploi : qu’est-ce qui est imposable et qu’est-ce qui ne l’est pas? Le présent texte se veut une réponse à cette question afin d’éviter, autant que faire se peut, la mauvaise surprise d’un avis de cotisation des autorités fiscales et de nouvelles discussions et/ou mésententes sur qui assumera cette nouvelle charge.

Le principe de base

Nous ne surprendrons personne en mentionnant que le principe de base en matière d’impôt est que tout revenu provenant d’une charge ou d’un emploi est imposable[1]. Selon les lois fiscales canadienne et québécoise, le traitement, le salaire ou toute autre rémunération, y compris les gratifications, sont imposables et sujets aux déductions à la source.

Comme toute règle a ses exceptions, surtout en matière d’impôts, il est possible dans des cas très limités que les sommes versées ne soient pas imposables.

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CRA Releases Details on Work from Home Expense Deductions and Certain Employer-Provided Benefits

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CRA Announces New Simplified Process for Claiming Work From Home Expenses and Formalizes the Tax Treatment of Certain Employer Provided Employee Benefits During the COVID-19 Pandemic

By: Kevin Yip, Devon LaBuik, and Kathryn Walker

On December 15, the Canada Revenue Agency (the “CRA”) released additional details regarding the availability of employee deductions for work from home expenses and the taxation of certain employer provided employee benefits during the COVID-19 pandemic.

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Be ready for CEWS audits

In response to the financial hardship caused by the COVID-19 pandemic, the Government of Canada introduced the Canada Emergency Wage Subsidy (“CEWS“) in April 2020, one of the largest tax programs in the country’s history, to help companies retain or recall their employees.

In the summer of 2020, the Canada Revenue Agency (“CRA”) announced that significant resources would be devoted to audit employers that have claimed the CEWS, leaving no doubt that the CRA was getting serious about enforcement. In September 2020, the CRA moved from words to actions as the first of these audits have already started, as may be seen from a copy of such CRA CEWS audit letter here.

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Demande d’annulation de pénalités et d’intérêts – La pandémie de la covid-19 répond-elle aux critères établis par la loi ?

Comme nous le savons tous, le Québec est entré dans la pandémie mondiale de la Covid-19 au printemps dernier. Le 13 mars 2020, le gouvernement du Québec décrétait l’urgence sanitaire qui , pendant plusieurs semaines, voire plusieurs mois, a paralysé le Québec et mis à rude épreuve l’économie des entreprises.

Le gouvernement du Québec et le gouvernement du Canada ont mis en place une série de mesures fiscales et financières visant à venir en aide aux travailleurs et aux entreprises : report de paiement de la TPS-TVQ, report de production des déclarations d’impôt ainsi que de multiples autres mesures. Ces mesures permettent essentiellement aux contribuables d’éviter de se faire imposer des intérêts et des pénalités en cas de retard dans le paiement de la TPS et la TVQ ou lors de la production des déclarations d’impôts.

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