The Trust in Real Estate Services Act, 2020, which amends the Real Estate and Business Brokers Act, 2002 (the “Act”) to allow real estate brokers and salespersons in Ontario to incorporate, received Royal Assent on March 4, 2020. The ability of real estate brokers and salespersons to form a “personal real estate corporation” (“PREC”) is governed primarily by Regulation 536/20 under the Act (the “Regulations”), which came into force on October 1, 2020.
The Regulations provide for, among other matters, the right for real estate brokers and salespersons to, effective October 1, 2020, incorporate a PREC (provided that the corporation meets certain prescribed conditions), an exemption to the registration requirement for PREC, and the right for a real estate broker or salesperson to receive remuneration through a PREC.
The Advantages of Incorporation
Corporations offer several benefits from a tax perspective, as well as for estate and retirement planning. Some advantages include:
- Lower corporate tax rate and deferral – In Ontario, the small business deduction allows up to $500,000 of active business income (which would include real estate business income) to be taxed at the lowest combined federal-Ontario corporate rate of 12.2% for 2020. Real estate business income earned in excess of $500,000 is taxed at the general federal-Ontario business corporate rate of 26.5%. For reference, in Ontario, the top marginal federal-Ontario personal income tax rate is 53.53% on taxable income exceeding $220,000. Once the profits are removed from the corporation, however, the benefits of deferral are decreased as the withdrawal will be taxed to the individual shareholder as a dividend or salary. When considering investment of capital retained in the corporation, we note that a corporation can have up to $50,000 of investment income in the prior year with no impact on the small business deduction. For every dollar of passive income over that amount, you lose $5 of the deduction, meaning once passive income exceeds $150,000, you lose the small business deduction entirely.
- Estate and Retirement Planning – Due to the lower tax rates, and by deferring the tax payable personally, incorporating allows real estate brokers and salespersons to keep more of their earnings and grow wealth more effectively for retirement. Additionally, shares of the company may pass through to beneficiaries without estate administration fees (probate fees) through a primary/secondary will estate plan.
- Lifetime Capital Gains Exemptions – The lifetime capital gains exemption (“LCGE”) allows a person who sells shares of a qualifying small business corporation to avoid capital gains tax on a significant part of any capital gain triggered resulting in considerable tax savings. In 2020, for example, the exempt amount is $883,384.00. A person can use the LCGE on more than one occasion until they meet their lifetime cap.
- Income splitting – Incorporating may allow real estate agents to engage in income splitting with and between family members, as the Regulations allow non-voting shares to be issued to the “family members”, which includes the real estate broker or salesperson’s spouse, child or parent. Income splitting should be undertaken in consultation with a tax professional as there were changes to the tax rules in recent years that eliminated income splitting opportunities in some situations.
Despite providing real estate services through a corporation, the real estate broker or salesperson will remain liable for the provision said services and will be required to meet all associated obligations and responsibilities as prescribed by the Act. Limited liability may however apply to any non-broker or non-salesperson services.
Regulations regarding Personal Real Estate Corporations
In order to meet the definition of “personal real estate corporation” under subsection 1(1) of the Act, the corporation must meet the following criteria:
- The PREC is incorporated or continued under the Business Corporations Act (Ontario).
- All voting shares of the PREC are legally and beneficially owned, directly or indirectly, by a broker or salesperson.
- The sole director of the PREC is the broker or salesperson.
- The president, being the sole officer of the PREC, is the broker or salesperson,
- Each non-voting share of the PREC is,
- legally and beneficially owned, directly or indirectly, by the broker or salesperson,
- legally and beneficially owned, directly or indirectly, by a spouse, child or parent of the broker or salesperson,
- owned legally by one or more individuals, as trustees, in trust for one or more children of the broker or salesperson who are minors, as beneficiaries.
- There is no written agreement or arrangement that restricts or transfers in whole or in part the powers of the sole director to manage or supervise the business and affairs of the PREC.
Additionally, provided that the following factual conditions are satisfied, a PREC is exempt from the requirement to register as a brokerage, broker or salesperson under the Act:
- The incorporated broker or salesperson must be employed by a brokerage to trade in real estate.
- The PREC must not carry on the business of trading in real estate other than providing services of the broker or salesperson.
- The PREC, the broker or salesperson, the non-equity shareholders, its employees and its agents must not represent to the public in any manner that the PREC carries on the business of trading in real estate.
- The PREC does not carry on business as a brokerage.
- The PREC does not receive, directly or indirectly, remuneration for trading in real estate from any person or entity other than the brokerage.
- The broker or salesperson receives remuneration from only the PREC or the brokerage.
- The PREC must not hold any money or other property of a client, customer or other person in connection with trading in real estate.
- There must be a written agreement between the PREC, the broker or salesperson and the brokerage governing the relationship, which ensures the PREC does not hinder the broker and salesperson in its duties under the Act and the brokerage in its duties under the Act.
- The broker or salesperson must notify the Real Estate Council of Ontario of the legal name and address of the PREC before receiving any remuneration.
- The PREC should register for an HST account with CRA after incorporation, as the broker or salesperson’s current HST account does not transfer.
It is important to note that the exemption from the requirement to register as a brokerage allows PREC’s to receive income from the provision of real estate services from a brokerage.
Administration of a Corporation
A note of caution: PREC’s will incur increased compliance-related costs, including incorporation fees, accounting fees relating to corporate filings, more onerous annual compliance obligations (both legal and accounting). Many of the above advantages only exist for high income earning agents who can afford to leave a certain portion of earnings in the corporation. All Ontario real estate brokers or salespersons should consult an advisor to determine whether the advantages of incorporation to him or her outweigh the administrative costs.