Can Real Estate Agents Incorporate?For real estate agents and brokers in Ontario, incorporation is a great way to enjoy tax savings and additional financial benefits. When planning your career in real estate, you should understand what incorporation means for your business. Visit our module on incorporation for a more in-depth view of the process.
Two Incorporation ModelsUntil 2020, there was only one way to incorporate in the province of Ontario. This was to set up a sub-brokerage or an Agent Brokerage. An Agent Brokerage is a corporation which is a fully functioning real estate brokerage under the laws of the province of Ontario. When an agent uses the Agent Brokerage model, they generally utilize the services of a service provider––typically their prior brokerage––to provide all the backend support services. Although the scope of services offered by service providers varies dramatically between brokerages, the best full-service brokers provide the following kinds of services:
- Accounting and deal processing
- Management support
- Training of any agents who work in the sub-brokerage
- Message paging/booking appointments
- Marketing support
- Legal defence assistance
In 2020 when the Ontario Government passed Bill 145, Trust in Real Estate Services Act, it allowed real estate salespersons and brokers to incorporate their businesses with a career sub- brokerage. But what does that actually mean?
With the introduction of the Personal Real Estate Corporation (PREC) model, agents were now allowed to pay their commissions legally to a corporation without having to go through the process of creating a brand-new brokerage. Under the PREC model the agent continues to be licensed at the original brokerage; the major change is that now the commissions can legally be paid directly to the agent’s Corporation.
There are numerous advantages to both the agent brokerage and PREC models. PRECs vs Agent Brokerage will provide a greater discussion of the pros and cons of each approach.
What is Incorporation?
Regardless of which model is used, incorporation is a legal process which is used to form a new legal entity, called a corporation. A corporation separates the assets and income of the business from its owners and shareholders. Agents would then typically receive all their income through the Corporation, which offers various benefits.
Provincial vs Federal IncorporationThere are two kinds of corporations an agent can use to incorporate their business: provincial incorporation and federal incorporation. Registering a company at the provincial level means that the scope of your business is limited to the specific province where you are incorporated––your headquarters must also be in this province.
If you have no plans to expand your real estate business into multiple provinces, provincial incorporation is probably the best answer as it is an easier process offers that less headache with no real downside. Meanwhile, federal incorporation means you are not restricted to completing transactions in one province. But the incorporation process requires that you also register your company as an extra-provincial corporation and file additional paperwork. Operating in another province may, of course, require registration under the appropriate real estate brokerage legislation in that province or jurisdiction.
Tax Deferral OpportunitiesBy earning income through a corporation, realtors pay a corporate tax rate instead of personal tax. In Ontario, personal tax rates can reach as high as 53.5% for a realtor whose annual income is above $220,000. Agents earning $220,000 through a Corporation, however, would incur the significantly lower Ontario small business tax rate of 12.5%, or 26.5% for an income above $500,000. This then allows excess income to be invested within the company, with personal tax only being incurred when funds are withdrawn as either salary or dividends. A realtor who accumulates savings inside the corporation can invest those savings from inside the Corporation in stocks, bonds, GICs, mutual funds, ETFs, or even investment real estate.
Splitting IncomeAgents who are incorporated can also create tax savings through income splitting. Income splitting is a process that allows a corporation to pay a fair salary/compensation to family members who are actively working in the business. Compensation can be paid as salary or dividends depending on the corporate structure. So, if a realtor splits their income between their adult children, their family’s tax burden would lessen because the children are (presumably) each in lower tax brackets.
Wealth BuildingThe biggest reason to incorporate your business is that it can dramatically accelerate your ability to build your wealth or net worth. This benefit is the result of having approximately 40% additional funds available for investing because of the reduced tax bill (i.e. the difference between 53.5% and 12.5%).
Assuming $100,000 of extra income is retained in the Corporation, this 40% saving could easily exceed $3million in a 10-year period.
Should I Incorporate My Business?Incorporating your business can be a complex and tedious process, particularly if your brokerage is not set up to assist or provide advice in this area.
A crucial part of incorporating is the added bookkeeping and financial reporting requirements of the Corporation. While this can be a tedious job, there are tools to help keep you organized.
Additionally, regardless of which model you use to incorporate, there is an upfront cost to set up a corporation as well as ongoing monthly costs. Each model also requires the agent to complete corporate tax return which is typically more expensive than filing of personal tax return. Setup vs Ongoing Costs provides great detail of the various costs of setting up and operating an agent brokerage and a PREC.
So, should you incorporate your business? It is absolutely a possibility worth considering if you:
- Have income in excess of your personal spending requirements and can leave the excess funds in the Corporation
- Want to take advantage of tax deferral opportunities
- Want to invest excess cash in income-producing assets
- Can split income with family members
For newer agents who are still in the early stages of growing their businesses, the benefits of incorporation may not yet be tangible. But by understanding the benefits of incorporation and how the process works, realtors can be more informed in deciding whether incorporation is right for them. For more insights, sign up for our incorporation seminar and get free online consultation with a CPA.