Canada's Condominium Magazine
Ontario realtors are optimistic that a change to the province’s Real Estate Business Brokers Act (REBBA), 2002 will finally allow them to enjoy certain tax benefits already available to other professionals such as chartered accountants, lawyers and doctors. The Tax Fairness for Realtors Act, 2017, has passed second reading at Queen’s Park and now goes to final debate and a final vote. It seems likely to pass, given that it has the support of the Liberals, who introduced it, and the NDP, who co-sponsored it. The Ontario Real Estate Association (OREA) has lobbied for the changes.
At issue is whether individual realtors can form personal real estate corporations (PRECs) in Ontario, as they already can in BC, Alberta, Saskatchewan, Manitoba, Quebec, and Nova Scotia. At present they cannot, prevented from doing so by REBBA. Only brokerages can be corporate entities in the real estate profession in Ontario. The amendments to REBBA would allow brokers and real estate salespersons to create a personal corporation solely for real estate business, as long as they are 100 per cent equity owners. This matters to realtors because, as the name of the act makes clear, forming a PREC can bring significant tax advantages, especially to higher-earning realtors.
The main benefit of a professional corporation is that the professional can provide his or her services through the corporation and direct all revenues to it, writing off their expenses and thus reducing their personal income. Money that is not needed for personal use during the calendar year can be kept in the corporation and taxed at the lower corporate rate, 15.5 per cent on the first $500,000 of business income. The rate rises to 26.5 per cent for every dollar above $500,000.
The tax benefit really applies to those realtors whose income varies significantly from year to year and is great enough to justify incorporating. The licensee can arrange for the brokerage to pay his or her commissions to the PREC where it can be left and taken out in future years, allowing the licensee to control yearly income. This is one of the amendments to REBBA contained in the Tax Fairness Act.
An example of the tax savings that could occur is given by a BC accountant firm, H&C Chartered Professional Accountants. In BC, PRECs have been legal since 2009. An unincorporated realtor there who earned $200,000 in commissions in a year but required only half of that amount for personal expenses would still pay income taxes on the entire amount, reducing the unused $100,000 by $57,670. Incorporated, the corporation would retain $86,500, paying the difference of $28,830 in income taxes later.
Realtors are pillars of their communities and hardworking small business owners. Personal real estate corporations will help them offer more services to clients, invest in new technology and create jobs in their community.
There are significant costs associated with incorporating, and OREA cautions that the paperwork required to meet regulations can be “onerous.” Tax rules can be complex, and corporations can be expensive to maintain. Despite these cautions, OREA believes that allowing PRECs will align the rights of real estate salespeople with those of other regulated professions and will lower taxes on Ontario businesses.
Tim Hudak, CEO of the Ontario Real Estate Association, commented in a release that realtors are “pillars of their communities” and that PRECs will allow them to offer more services to their clients, invest in new technology and create jobs.
A much-cited study by the Centre for Spatial Economics in 2015 found that personal real estate corporations would have a positive, though modest, impact on the provincial economy, creating as many as 89 new jobs annually and contributing up to $25 million annually to Ontario’s GDP.