The Government of Ontario has introduced new legislation titled the Trust in Real Estate Services Act or TRESA.
Real Estate Agents… have you heard? You can now Incorporate
Say hello to the PREC (Personal Real Estate Corporations)
The Government of Ontario has introduced new legislation titled the Trust in Real Estate Services Act or TRESA. This legislation overrides the older Real Estate and Business Brokers Act (REBBA) and this changes the way you do business as a realtor. Note that this will not change in general the total tax payable to the government, however it does offer some advantages to the realtor in terms of tax deferral and other tax planning issues.
How do things change?
Previously, if you qualified as a self-employed realtor you would have to fill out the T2125 Statement of Business Activity. Essentially this meant that all your business income less your business expenses would be reported in the year earned and the net amount would be taxed at your tax bracket. Now with the PREC, you can actually choose to defer some of the income earned to the future. This means that you can hold that cash in your corporation (which is taxed at a lower rate) and withdraw it at a later date when you have moved to a lower tax bracket.
How it could benefit you
Assume that you have made a total of $100,000 in commissions. Under old system you would have no choice but to report the entire amount in that year's income. You would deduct your business expenses and be taxed on the net amount at your income bracket. With the new legislation, you will report the $100,000 within the corporation with all associated deductions and be taxed at the more favorable corporate tax rate of 11.5% (Ontario General Corporate Tax Rate in this example). Then, you can hold that cash inside the corporation and withdraw it to the extent that you decide, only when you withdraw from the corporation will you be taxed on this additional amount at your personal tax bracket.
Incorporating vs. Self-Employed
Now let’s look at why you might consider incorporating (or not!) under the new legislation
Advantages
Lower corporate tax rates
Tax deferral
Income Splitting (Beware of TOSI rules)
Disadvantages
Administrative charges (incorporation fees, accounting fees)
Strict compliance with reporting and filing
May advantage high income earners more than others
Overall, we believe that incorporating is the right way to go, however it is important to understand your unique situation before pulling the trigger on incorporation.
Speak with us today to see if incorporating makes sense to you.