If you’re a Canadian real estate agent, you’ve probably heard that incorporating can offer tax savings and other financial benefits. But is it the right choice for you? Incorporation can be a strategic move, especially for agents with high annual incomes, but there are nuances to consider before diving in. This guide walks you through the advantages, costs, and key factors to help decide if incorporating could work for you.
Why Incorporate as a Realtor?
Incorporation in real estate means setting up a “Personal Real Estate Corporation” (PREC). This structure was only made possible after recent legislation in several Canadian provinces, which now allows agents to incorporate and reap the financial perks typically reserved for businesses. But what makes it so appealing? Here are a few reasons many realtors are taking the plunge:
- Potential Tax Savings: The most common motivation for incorporating is tax deferral. A PREC allows you to pay a lower corporate tax rate on income left in the corporation, rather than paying personal tax rates immediately on every dollar earned.
- Income Splitting with Family: If you choose to incorporate, you may be able to issue dividends to family members, reducing the tax burden by splitting income across multiple people.
- More Flexible Retirement Planning: With a PREC, you can accumulate and invest profits within the corporation, potentially benefiting from compound growth on investments with a reduced tax rate.
- Enhanced Deductibility of Expenses: In a PREC, certain expenses related to running your business—like office space, marketing costs, and business travel—can be claimed at the corporate level, which may offer tax benefits.
Tax Savings by the Numbers: Corporate vs. Personal Tax Rates
Let’s get into the numbers to understand the tax savings. In Canada, corporate income tax rates are significantly lower than personal income tax rates, particularly for small businesses.
- Corporate Tax Rates: Small businesses in most provinces can benefit from a corporate tax rate around 12-15% on the first $500,000 of business income.
- Personal Tax Rates: The highest personal income tax rate in Canada can go over 50% depending on your province.
With incorporation, you have the opportunity to keep more of your earnings in the PREC, deferring the full personal tax hit until you actually draw the income out. This strategy could mean substantial tax savings if you don’t need to take all your earnings as personal income every year.
Incorporation Costs to Consider
Incorporating isn’t free, and there are a few costs to be aware of:
- Initial Setup and Legal Fees: Registering your PREC involves legal paperwork and may require an initial investment of $1,000–$3,000.
- Accounting Fees: Ongoing accounting costs for a PREC are often higher than for sole proprietors. Expect annual fees ranging from $1,500 to $3,000 or more.
- Administration and Compliance: As a corporation, your PREC will need to file annual corporate tax returns, maintain minutes, and follow other corporate compliance rules.
In total, incorporation costs vary widely, but many agents find that the tax savings can easily outweigh these expenses.
When Does Incorporating Make Sense?
Incorporation doesn’t work for everyone, so before making a decision, consider these scenarios where incorporation may (or may not) be beneficial:
When It’s a Good Idea
- Consistent High Income: If your annual income exceeds the needs of your personal lifestyle and you can afford to leave some earnings within the corporation, incorporation may make sense.
- Desire to Build Savings for the Future: If you’re hoping to invest in long-term savings or real estate, a PREC can enable this with less immediate tax impact, allowing your investments to grow.
- Retirement and Succession Planning: Planning to retire in the next few years? A PREC allows you to draw funds gradually in retirement, potentially saving on personal taxes.
When It May Not Be the Right Fit
- If You Need All Your Income Now: If you’re just starting out or rely on all your income for day-to-day expenses, the tax deferral benefit of a PREC may not be as useful.
- If You Don’t Anticipate Consistent High Earnings: For agents whose incomes vary widely or are in the early stages of their career, it might be better to wait and incorporate once income stabilizes.
Steps to Incorporate as a Realtor in Canada
If you’re ready to proceed, here are the general steps for setting up a PREC:
- Consult with a Tax Professional: Incorporation can get complex, so start by consulting with an accountant or tax advisor familiar with real estate and corporate taxes in Canada.
- Review Your Provincial Guidelines: PREC regulations vary by province, so ensure you understand the requirements specific to your area.
- Set Up Your PREC: Register the business with your province, and establish the appropriate share structure (this is where legal advice is critical).
- Organize Corporate Bank Accounts and Records: Your PREC will require separate banking and bookkeeping to keep personal and business expenses distinct.
- Keep Up with Compliance: Plan to meet annual compliance requirements, including corporate tax returns, record-keeping, and any necessary shareholder meetings.
How Does a PREC Impact Your Personal and Business Life?
While incorporating can bring clear financial perks, it’s also a commitment. Running a corporation adds complexity to your business and personal finances, so consider how these changes might affect your day-to-day operations.
- More Record-Keeping: Corporations need to maintain accurate records for tax purposes, which might require more time or hiring a bookkeeper.
- Increased Responsibility for Compliance: Maintaining corporate compliance may require extra steps compared to operating as a sole proprietor.
- New Financial Management Decisions: Deciding when to draw personal income, how much to invest in the corporation, and planning for retirement all become more flexible, but they also demand careful planning.
Key Takeaways
Incorporating as a realtor in Canada can open up significant tax-saving opportunities, especially if you’re a high-income earner looking to defer taxes and build wealth. However, incorporation is best suited to agents who can manage the additional costs, compliance requirements, and financial planning it entails. Before making the decision, consulting with a tax professional can help you weigh the pros and cons based on your personal situation and long-term goals.
Schedule a Consultation with David to learn more about how we can help you incorporate!
