Already in Ontario, many other regulated professionals (e.g., doctors, lawyers, engineers, architects, accountants) can incorporate their business. Ontario real estate agents are currently excluded from this group. But it looks like that may soon be changing.
In many Canadian provinces, other than Ontario, real estate agents can incorporate their business. It was back in 2008 when British Columbia became the first province to allow for the incorporation of real estate agents. Following that, Quebec, Manitoba, Saskatchewan, Alberta, and Nova Scotia all joined to allow real estate agents to use a Personal Real Estate Corporation (PREC).
Around the same time British Columbia became the first province to allow for the incorporation of real estate agents, Ontario legislation was first introduced to amend the restriction in the province. However, it was not passed.
Bill 104, Tax Fairness for Realtors Act, 2017
Recently, Bill 104, the Tax Fairness for Realtors Act, was introduced in an effort to allow a PREC to be registered as a broker or salesperson. Earlier in the year, Bill 104 passed its first and second reading on March 8, 2017 and March 23, 2017. If Bill 104 continues to move through the legislative approval process and receives Royal Assent, following approval at its third reading, it will become law in Ontario.
Current Real Estate and Business Brokers Act, 2002 (REBBA) restrictions
Registered sales people are currently being restricted from incorporating under two aspects of the REBBA. Firstly, the REBBA does not provide for the licensing of a salespersons as personal corporation and, secondly, it does not permit a broker to pay commissions to an unregistered entity. These two sections alone firmly prevent a salesperson from conducting business through a corporation.
Bill 104 – rules and restrictions
Bill 104 is expected to adopt similar or identical restrictions to the already existing Professional Corporations (PC’s) for other professionals, including:
1. An individual owns all of the equity shares in the corporation.
2. All of the non-equity shares, if any, in the corporation are owned by the individual who owns the equity shares in the corporation, the members of the immediate family of that individual or a corporation of which all of the equity shares are owned by that individual or the members of the immediate family of that individual.
3. The name of the corporation includes the words “Personal Real Estate Corporation” or “société personnelle immobilière” and complies with the rules respecting the names of personal real estate corporations set out in the regulations.
4. The corporation is not authorized to carry on a business other than the profession of trading in real estate.
For some professionals, such as lawyers and accountants, ownership in their PC’s is restricted to licensed professionals. However, it does not look like that would be the case with the PREC. And, as a result, the ability to potentially split income with other family members, who can own shares in the corporation, may prove to be very advantageous in many situations.
Many tax planning opportunities available to other corporations and business owners would also be available to PREC’s and the owners.
The current small business corporate tax rate is only 15% on the first $500,000 of active income, and 26.5% thereafter, whereas the current combined Ontario/Federal top personal marginal tax rate is over 53%. Essentially, a significant tax deferral would most easily be achieved if the real estate agent could leave income in the corporation – i.e., they do not need to draw it out to spend on their personal life. This would allow the corporate retained income to only be taxed at the corporate level and the personal tax would be deferred until it was withdrawn.
At the same time, actual tax savings, rather than just a deferral, could also be achieved. This is often done by having different family members owning different classes of shares in the corporation, allowing them to split income with family members. The rules are specific and the benefits are dependant on the specific situation.
Other things to consider
1.The Ontario Business Corporations Act (OBCA) is applicable to all Ontario corporations. This would mean that the OBCA and its regulations would need to be considered during the setup of a PREC.
2. There would be legal and accounting fees associated with the setup and maintenance of a PREC. Depending on the income, these costs should easily be outweighed by the income tax savings and deferral.
3. There would likely be an association application and annual renewal fee.
4. Non-compliance with OBCA and its regulations could result in the mandatory dissolution of the PREC.
5. A corporate minute book would need to be maintained as required by the OBCA. This would help avoid potential legal issues and issues with CRA. It is worth noting that there is the potential for significant penalties for failure to maintain corporate records, including liability of fines up to $25,000. The directors and officers of the corporation can also be personally liable.
Even though real estate agents would provide services to clients through a PREC, the agent would likely remain liable for the services and would be required to meet all associated obligations and responsibilities. Misconduct could result in the Real Estate Council of Ontario (RECO) disciplining the real estate agent and the PREC, including the possibility of suspension, cancellation or restriction of a license.
Third reading takes place after the Standing Committee reports back to the legislature with any recommended amendments. At that time, the Bill is voted on for final approval and only becomes law after it receives Royal Assent. The date the Bill comes into force can either be immediately after receiving Royal Assent or later as specified.
Assuming no unexpected issues, it is certainly looking as though the Bill will become law.
Any real estate agent considering a PREC should ensure they seek professional tax and legal advice. Although Bill 104 would certainly be a great advantage to many real estate agents, especially those with relatively high current and future expected incomes, there are many considerations for the agent and their advisor to consider before formalizing the existence of a PREC and the process will be quite involved.
Deuzeman & Associates can assist real estate agents considering setting up a PREC to help ensure that the proper structure is in place to meet the business and personal objectives of themselves and their family members, while taking advantage of any available tax planning opportunities.
Please feel free to contact us for additional information or to discuss your situation. We would be glad to assist you.
Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.