Did you know that realtors weren’t allowed to incorporate and receive commissions through corporations until just two years ago?
In March 2020, a couple of local MPPs brought a bill to Parliament that passed and incorporation for realtors became an opportunity. An opportunity for realtors to build their retirement fund using a real estate portfolio with corporations.
In essence, when a realtor decides to incorporate, the realtor owns their own real estate business in the corporation. Once a realtor is incorporated, he/she runs his/her businesses through the corporation. All commission income, related expenses, business assets and liabilities are all run through his/her own corporation.
Corporation is considered a separate legal entity in the eyes of the law. As a result, it files taxes on its own. Thankfully, in Ontario, most small business corporations are paying 12.2% income tax on net income received.
Because corporations are considered separate legal entities, when you withdraw money from the corporation, the withdrawal can trigger tax implication on your personal tax return.
Now to answer the question most of you may be asking (why would I do that?), keep reading.
You can even watch this video which addresses most of your questions.
Why should realtors incorporate?
- Use Tax Savings made in your realtor business for your Retirement Savings
You pay only 12.2% income tax rate on your net realtor income inside a corporation (as opposed to most realtors being taxed upto 53.5% if they don’t incorporate). This means you have 87.8% left available for reinvestment in the corporation, without paying another level of personal taxes.
The savings that you are achieving through a corporate structure is
You could invest in your retirement by buying a few investment properties as well, or invest in high dividend paying stocks, allowing you to build a passive stream of income.
- Split income with your family members
Income splitting via corporations is not as easy as in the past. In 2018, Government of Canada enacted a bunch of new rules significantly increasing the difficulty of income splitting with service corporations.
There are still a few ways to split income with your family members though:
For the family members who work less than 20 hours per week in the past 5 years, you can pay lower income family members a reasonable amount of compensation, based on the work performed.
If your lower income family members are working at your business for over 20 hours a week in the past 5 years…
you can still issue dividends to them thus achieve income splitting and lower your overall family tax bill.
If you reach the age of 65….
you’re eligible to split income with your lower income spouse.
If you create a proper plan…
you can even split investment income you earn in your corporation with other family members properly.
Therefore, income splitting is still a possibility! You will need to jump through a few hoops to lower your taxes, but it’s possible. Of course, it requires careful planning and a professional that can help you avoid all the tax traps out there!
- Split income with your spouse when you reach the age of 65
One way to split income with your spouse is when you reach the retirement age of 65. You can do this via dividend income. For this, a proper corporate structure needs to be in place when the corporation is set up.
You can read more on this in my book, where I illustrate in depth using examples.
- Smooth out income over the years
Building a business is not an easy task. You may do well some years while not so well in other years.
You may do well some years while not so well in other years,
If you don’t have a corporation, in the years that you do well, you pay a lot of taxes. Remember, that the highest marginal tax rate in Ontario for personal taxes is 53.5%.
For the years that you don’t do so well, you have way less tax to pay.
By using a corporation to own your realtor business, you’re paying 12.2% corporate taxes regardless of good years or bad years. You take out what you need to support your lifestyle. Some of the income can be retained in the corporation for future years, thus allowing you to split income with your future self when business may not be as good in some years.
Corporations can provide tax planning flexibility and tax deferral opportunities.
If you incorporate…
flexibility can be built in to split income with spouse or adult children.
If you incorporate…
you may be able to sell your business (active business not rental portfolio) sheltering a significant amount of capital gain tax.
If you incorporate…
you may be able to invest through the corporation structure much faster, by using the money that you would otherwise pay to CRA as personal income tax to invest for yourself, even with the tax changes imposed earlier this year!
SO, in conclusion, YES, in my professional opinion, if you make more than you need to support your personal lifestyle, realtors should incorporate.
It is important to remember that every individual’s situation is different, as I advise all my clients, it’s best to sit with your personal accountant to discuss your options further.
You can always sit down with a member of our team, a professional that is familiar with the new rules, regulations and can provide the best advice for your personal situation.
Hope this helps you answer the question of whether you as a realtor should incorporate?
Until next time,
Cherry Chan, CPA, CA
Real Estate Agent Accountant