Is It the Right Time to Incorporate Your Real Estate Business?

Incorporating a business is equivalent to separating your company from yourself and giving it a separate identity. Regarding real estate services, the Canada Revenue Agency (CRA) allows you to create a Personal Real Estate Corporation (PREC). While it has the benefits of a corporation, a few things set it apart. It is a personal corporation, which means only you can own 100% voting shares and no one else. However, you can allot non-voting, dividend-paying shares to your family members.

While incorporation separates personal and professional liability, things are different with PREC. The Controlling Individual will be held responsible for professional misconduct by PREC and vice versa. Any suspensions, cancellations, or restrictions on one’s licence will apply to another. Think of it like any professional, like a lawyer, doctor, or accountant, working in an individual capacity and incorporating their business. While incorporation separates legal liability, professional liability is interlinked.    

Why Incorporate Your Real Estate Business?

In a PREC, you and your company obtain a license at the same level for the same services with the same related brokerage. The question arises as to why maintain two licenses when you can offer the same services at the cost of one license as a sole proprietor. And that is what this article digs into.

Incorporation has its benefits – legal, tax, financial, and operational. When these benefits outdo the administrative cost of maintaining two documents and licenses, you might consider incorporating your real estate business.

Tax Considerations of PREC

The primary reason for incorporation is tax. A Canadian corporation can avail of the small business deduction. The first $500,000 of your annual active income is taxed at a 9% federal rate and applicable provincial rate. As a sole proprietor, your income is taxed at the personal income tax rate, which starts at a 15% federal tax rate.

Defer taxes: You can plan your taxes more efficiently with a PREC. Suppose you earned $450,000 in a year and have around $150,000 left after tax. You can withdraw a small amount of around $50,000, as withdrawals are added to your personal income and taxed as per the tax slab you fall under. You can retain the remaining amount in the company and reinvest it in return-generating ventures. While the money grows in the business, you can control withdrawals, which means you can withdraw a higher amount when your personal income is low.    

Income splitting: You can also withdraw the entire $150,000 by employing your family members in the PREC and paying them a reasonable salary per industry standards. However, note that you must treat your family as an employee and deduct Canada Pension Plan (CPP) contributions and income tax deductions.

Note that the CRA has strict rules around income splitting. Talk to a professional tax consultant to ensure that your salary and dividends to your family members do not violate these rules.

Special Business Expenses: You can deduct business expenses from the income even as a sole proprietor, but a PREC allows you to deduct two specific deductions. (1) You can withdraw money tax-free from the business for personal health expenses under the Health Spending Account. (2) You can deduct the fees paid to a retirement counsellor from taxable income.

Incorporating could be an option if your real estate business has a regular annual income closer to $500,000 and the tax savings are significant compared to the administrative cost.

Operational Considerations of PREC 

As a sole proprietor, your operational expansion is limited. A PREC allows you to scale your business by hiring employees. However, a PREC cannot venture into businesses other than real estate services. For instance, a PREC cannot build a house or store. Nor can it trade extensively in stocks that make capital gains from stocks its primary source of income. However, a PREC can use the retained earnings to invest and earn small gains.

Contact KSSP Partners LLP in Markham to Help You Incorporate Your Business 

These are just a few considerations. A professional accountant can assess your business and guide you on incorporation. At KSSP Partners LLP, our accountants and tax consultants can provide advisory services such as incorporation and tax planning. To learn more about how KSSP Partners LLP can provide you with the best accounting and tax planning expertise, contact us online or by telephone at 289-554-5997.