Ontario realtors: Maximize your business income by forming a PREC
Forming a Personal Real Estate Corporation (PREC) can help you save large sums on taxes, allow income splitting, and earn you more gains.
Cheshta Mann
Mar. 25, 2021
4-minute read
Ontario realtors are in for a great deal and can now maximize their income and reduce expenses by turning their businesses into a Personal Real Estate Corporation (PREC) Opens in a new window..
Last fall, the Ontario government rolled out new guidelines for realtors under the Business Corporations Act that allow realtors to enjoy the many benefits of a corporation. PREC, a legal entity that is separate from the controlling registrant, the person who creates the company, allows realtors to enjoy the business advantages of incorporation, including tax and income planning benefits.
So what really is a PREC?
Just like dentists, lawyers, and other professionals enjoy the perks of having a professional corporation, PREC is designed to offer similar benefits to realtors, brokers, and real estate agents in Ontario. To be eligible for forming a PREC, the controlling registrant must be an existing member of the Real Estate Council of Ontario (RECO).
It’s important to note that a PREC is not a professional corporation as considered under the Business Corporations Act and differs from traditional private corporations in the following ways:
- Only REALTORS® can be voting shareholders of a PREC
- Either the REALTOR® or the PREC or both are subject to the oversight and regulatory powers of RECO
- The PREC can only be used if specific rules and regulations are followed
- A PREC does not limit professional liability
If your annual income is significantly greater than sufficient to meet your annual expenses, and you’re looking for additional tax-savings and other income-generating opportunities, then it’s a great idea to incorporate your business with PREC. We can help you start your business journey today. If you’re already in the process of forming a PREC, learn what business account best fit your needs.
Let’s admit it: we all want to pay less taxes and keep more of our hard-earned income.
“Realtors will be able to significantly reduce their taxes by using a corporation. For instance, the first $500,000 of net income in an Ontario corporation is taxed at a corporate tax rate of 12.2% whereas some realtors are probably paying a personal tax rate of 53.53% on any income earned over $220,000. With PREC, we’re talking savings of up to 41.33% a year,” said George Wall, founder of CPA4IT Opens in a new window..
CPA4IT is an online accounting firm that has been providing tax accounting and bookkeeping services to Ontario realtors and other professionals for over 35 years. They also offer Ontario realtors a free evaluation of whether or not the new legislation is suitable for them.
With PREC, any net income over $500,000 is taxed at 26.5%, which is half the personal tax rate of 53.53% that you would have to pay as an unincorporated real estate agent. To learn about some examples of how exactly the tax rates will affect your income, review our REALTOR® Inc. report.
Technology will continue to be on a rapid rise, so the best practice for realtors is to stay updated on tech-trends and gain a competitive edge in the industry. Not only should you market your services on social media but also take advantage of virtual experts and apps offering specialized services like payroll or social media analytics.
George’s team offers business owners an online tool to calculate the estimated tax savings on a PREC versus a sole proprietorship Opens in a new window..
With CIBC SmartBanking, you can access powerful banking tools like QuickBooks® Online and Xero, as well as Ceridian Powerpay Plus, to handle your everyday business needs.
“With Smart Banking, business clients can delegate multiple users to access their business account and allow their accountant to obtain and view monthly statements. It’s a convenient way for clients to complete transactions, from the comfort of their own home and get more time in the day to focus on their business,” said Melissa Dela Cruz, CIBC Business Advisor Opens in a new window..
Reduce incorporation fees
Registering a PREC may invite some healthy doubts or questions about potential costs or expenses. Here are a few points to note before starting your PREC:
- No dual registration is required for you and your corporation
- If your PREC complies with the standards, then you don’t have to register it under the Trust in Real Estate Services Act, 2020 (TRESA), formerly known as the Real Estate and Business Brokers Act
- You don’t pay licensing fees annually
It helps to know if a PREC is right for you, so consult a professional who knows the legislation. Realtors must differentiate their corporation’s status from a personal service firm to enjoy tax-deferral and tax saving benefits.
It’s best to keep business and personal expenses separate. “So when you are reconciling the account for month or year end, it’s easier to differentiate transactions to write off within the two separate accounts,” said Melissa.
Learn more about the benefits of forming a Personal Real Estate Corporation Opens in a new window.
To create a tailored plan for your business needs and help you achieve your goals, meet with us Opens in a new window.. We’re here to help. Talk to a CIBC business advisor today by calling 1-866-992-7223 Opens your phone app..
Written by
Cheshta Mann
Cheshta Mann is a freelance writer based in London, Ontario. She works with a diverse range of clients across industries. With her financial background and a seven-year writing tenure, she takes pride in supporting content development for CIBC. Cheshta is also pursuing her career in the accounting field.
