Bill 104, Tax Fairness for Realtors Act, 2017 represents a potential opportunity for realtors in Ontario to engage in tax planning strategies that were not previously available to them. Under this proposed Bill, realtors will be permitted to establish a Personal Real Estate Corporation (PREC) and take advantage of the many benefits associated with practicing through a professional corporation. Currently, Bill 104 has been approved in the 1st and 2nd read at the Legislative Assembly of Ontario.1 If it receives Royal Assent, it will come into force.
Ontario has lagged behind other Canadian provinces which currently permit realtors to incorporate professional corporations. British Columbia, Quebec, Manitoba, Saskatchewan, Alberta, and Nova Scotia have already implemented legislation that allows realtors to incorporate a professional corporation. If Bill 104 comes into force, realtors in Ontario who establish a PREC will be permitted to trade real estate through their PREC, and the activities of the PREC will be restricted to carrying on the business of trading real estate. Additionally, the PREC must follow the rules under the Ontario Business Corporations Act pertaining to professional corporations, including those regarding the name of the corporation as well as restrictions with respect to permitted shareholders.
The proposed Bill will put realtors on equal footing with other professionals such as dentists, lawyers, veterinarians, physicians and other health professionals, when it comes to the ability to establish a professional corporation, and it will provide realtors with the opportunity to take advantage of the many benefits of incorporation. Some of these benefits include the issuance of dividends or payment of salary to family member shareholders2, deferring tax by virtue of retaining earnings in the corporation, as well as other tax and retirement planning strategies.
Incorporating will allow realtors to benefit from the small business tax rate, which is 12.2% on the first $500,000 of income earned. In the case of Canadian Controlled Private Corporations, any income that exceeds $500,000 is typically taxed at 26.5%. The opportunity to benefit from a lower tax rate is a significant advantage since, generally, individuals whose income exceeds $220,000 per year are taxed at 53.53% on each dollar they earn over $220,000 in a fiscal year.
Additionally, incorporating a professional corporation may provide realtors with the opportunity to split income with family member shareholders through the issuance of dividends or payment of a reasonable salary for services provided by the family member to the corporation. Essentially, income splitting is the process whereby high-earning individuals can shift income to lower earning family members as a way of reducing their personal tax burden. The amount of income paid to family members in the form of dividends or salary must represent a reasonable return on their contribution to the business. Otherwise, the income paid to these family members would be subject to the tax on split income (TOSI) rules and would be taxed at the highest marginal tax rate.
Even though realtors may choose to incorporate a PREC, practicing through a PREC will not protect realtors against liability for professional negligence. The realtor remains liable for errors and omissions made as a shareholder of the corporation and he or she continues to have ethical obligations under the Real Estate and Business Brokers Act, 2002, and any other applicable legislation.
We will continue to monitor the progress of the legislation through to Royal Assent and post a supplementary blog post when the ability to incorporate becomes a reality for realtors.
1. Legislative Assembly of Ontario, "Bill 104, Tax Fairness for Realtors Act, 2017", online: https://www.ola.org/en/legislative-business/bills/parliament-41/session-2/bill-104/status.
2. Income splitting through the payment of dividends or salary is impacted by the tax on split income (TOSI) rules, implemented by the federal government in 2018
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.