Personal Real Estate Corporation (PREC) Services in Canada
Is a Personal Real Estate Corporation (PREC) the Right Choice for You?
The answer varies on several points. Here are three key reasons why business owners opt to incorporate.
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For real estate agents, taxes matter much. In Ontario, the highest personal income tax is 53.53%. This means that when a realtor becomes very lucrative, over half of that earned income would be heading straight to the taxation pot. However, being incorporated as a Personal Real Estate Corporation (PREC) means that there would be massive tax savings. If your taxable income is below $500,000, your corporation will not be taxed too highly since it is around 12.5% for the first half a million, while any amount above $500,000 is taxed at 26.5%.
Advantages of PRECs for Realtors
The advantages of PRECs are similar but have some specific differences. PRECs are considered professional corporations and provide some advantages to professionals who work in the real estate sector.
What is a professional corporation?
A professional corporation is a form of corporation providing professional services and subject to regulation by a governing body, such as the Real Estate Council of Ontario (RECO). This will ensure that the professionals in real estate operate in line with industry standards and regulations but provide certain tax benefits and liability protections.
Should You Consider a Personal Real Estate Corporation (PREC)?
A Personal Real Estate Corporation, or PREC, provides many advantages, including tax benefits and liability protection. Ontario real estate agents are regulated through the Real Estate Council of Ontario (RECO) in matters concerning PRECs. This will ensure that a realtor can follow industry standards while taking tax-saving opportunities. You can lower your taxable income and build an efficient business structure by incorporating your real estate business.
Incorporation as a PREC is one of the primary considerations in order to realize various tax benefits. Particularly when your income becomes large enough, you can greatly minimize your tax rate by forming a corporate structure as a realtor. The tax savings allow you to reinvest into the business or build personal investments, a common strategy of successful real estate professionals.
Tax planning strategy
As an unincorporated realtor, you could be subject to the highest marginal tax rate (depending on your income). As a PREC, the tax rate is much lower and set at 13.5%. The additional tax savings can then be used to build your investment portfolio.
PRECs are not allowed to invest directly within the corporation, so a holding company should be set up. Although these are taxed at higher rates, they generate a Refundable Dividend Tax on Hand balance, which is refunded to the holding company when dividends are paid out to the shareholder. With no other sources of personal income, approximately $40,000 in dividends can be paid out tax-free! But wait, there’s more…
When the property is sold, 50% of the gain on the property is allocated to the Capital Dividend Account. Any dividends paid out from this account are entirely tax-free!
Want to know if a PREC is right for you?
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