By creating a Personal Real Estate Corporation (PREC), Ontario’s realtors stand to save big. In this article, we go through the what, why, and how of this terrific new financial tool.
If you’re a realtor in Ontario, congratulations: you’re in for some tremendous savings. In late 2020, the Ontario government rolled out new rules allowing real estate agents to form a Personal Real Estate Corporation, or “PREC.” By incorporating under a PREC, realtors can benefit from the comparatively low corporate tax rate and keep more of their money in the long run—a lot more.
And that’s just the tip of the iceberg. From income splitting to financial planning, PRECs offer real estate agents a wide array of benefits that they would be wise to take advantage of. So let’s dive in and take a look at the wonderful world of PRECs.
What Is a PREC?
A PREC is a business entity that is legally separate from the individual realtor for tax purposes. That means that you and your PREC follow separate tax procedures at separate rates—the PREC rate being much lower.
Though two tax-paying entities rather than one sounds like a more complicated financial set-up, the benefits are nothing to sneeze at, and a little bit of upfront legwork can spell massive savings.
The Main PREC Benefit
As already hinted at, the main benefit of setting up a PREC is that its income is taxed at a lower rate than individual income is—a lot lower.
Let’s say you made $300,000 last year in commissions. Without a PREC, you would be paying a combined federal and provincial tax bill of 40.62%, or $121,849. Guess how much you would be taxed under a PREC? Just 12.2%, or $36,000. Quite the difference, isn’t it?
Now, the picture in real life is a bit more complicated, as you have to pay yourself a salary. But even if you paid yourself $100,000 (and left $200,000 in the PREC), the tax rate on your personal salary would be around 23.45%, or $23,454, while the remaining corporate income would still be taxed at the much lower 12.2%. All together, you would be paying just $47,854 in taxes compared to the $121,849 above. Or maybe $74k isn’t that much to you?
Of course, there’s a bit more fine print to be aware of—any corporate income above $500,000 is taxed at 26.5%, for instance, rather than 12.2%—but the overall picture should be clear. PRECs offer significant tax savings, and we accountants don’t use the word significant lightly.
What Other Benefits Are There?
On top of the tremendous tax savings already mentioned, PRECs also provide income tax splitting opportunities, in the event you would like to pay family members via a salary.
They also allow you to hire employees to assist with your business. It should be noted, however, that if a PREC employs individuals, the PREC must pay payroll taxes, CPP and EI to the CRA either monthly or quarterly.
Am I Eligible?
To be eligible to set up a PREC, you must be a member of the Real Estate Council of Ontario (RECO).
How To Set Up a PREC
A PREC will need to have its own Business, HST and Payroll Number registered with the CRA. HST remittance is due March 30 annually, and annual corporate income tax filings are due June 30.
To set up a PREC, it helps to have an organized accounting system to collect and review your annual revenues and expenses. That will assist in reducing the HST payable annually and help with your corporate taxes payable. A separate business savings account should also be set aside to review and track your business revenues and expenses and assist with potential HST.
Incorporation fees and annual filings are higher and range between $1100 – $1,800
The Bottom Line
The verdict is in: if you’re an Ontario realtor or broker and a member of RECO, then a PREC may be the tax saving and financial planning tool you’ve been waiting for.
To begin setting up a PREC or learn if a PREC may be right for you, give us a shout at firstname.lastname@example.org, call toll-free at 1-844-445-5847, or send us a note on our website. We’d be happy to help.