The Ontario Real Estate Association (OREA) is finally getting what it wants: modernized rules for real estate brokerages, brokers and salespersons. In November 2019, the Ontario government introduced the Trust in Real Estate Services Act (TRESA), which comes with multiple financial benefits for real estate agents, including better tax rates, tax deferrals, and income splitting opportunities.
For a long while now, OREA has been pushing for change, arguing that Ontario’s real estate rules were outdated. TRESA updates and amends certain aspects of the Real Estate and Brokers Business Act (REBBA) which was put in place in 2002, over 18 years ago. Like REBBA, TRESA oversees the rules and regulations that real estate salespeople and brokers must abide by. As we head into the new decade, it’s about time the rules were updated.
The main goals of Trust in Real Estate Services Act, 2019 are the following:
1. Improve consumer protection and choice in the market
2. Improve professionalism among real estate professionals and brokerages through enhanced ethical requirements
3. Give the Real Estate Council of Ontario (RECO) more powers to address malpractice and increase standards for real estate professionals
4. Create a stronger business environment by allowing real estate professionals to incorporate and be paid through the corporation
5. Reduce regulatory burden
As a real estate professional, the primary benefit to you would be the fact that real estate agents are now allowed to incorporate in Ontario and have family members as shareholders. Here are the key takeaways regarding incorporation for real estate professionals:
- Lower tax rates: TRESA creates a stronger business environment for real estate agents by allowing incorporation. By incorporating, this means that real estate professionals will find lower tax rates: in 2020, the small business deduction will be at 12.5% versus the highest personal rate of 53.53%.
- Tax Deferral: There is approximately up to 41% tax deferral for some individuals (specifically for individuals who are earning at least $220,000). Real estate agents will only be taxed personally for the actual money paid out from the corporation. This can be paid either by issuing dividends and taking advantage of the dividend tax credit or through salaries and thus reducing corporate income taxes.
- Opportunities on income splitting: Family members can be paid a reasonable salary for services provided which would be a deductible expense for the corporation. The new rules allow for family members to be shareholders, but issuing dividends to them is subject to very complex tax rules which should be reviewed by tax professionals like us.
- Capability for expenses being paid out of the corporation using lower rate after-tax dollars. For example, if you had $1,000 of income in a corporation, you would have after-tax dollars available of $875 versus only $465 if the business is held personally. These after-tax dollars could be used to pay for expenses such as life insurance premiums.
- Transfer of assets: You’ll also need to note that any assets that a real estate agent currently owns can be transferred into the corporation and funds can be taken out of the corporation tax-free up to a certain amount as a result of the transfer.
- Legal costs and tax filing requirements: If you’re incorporating, don’t forget to factor in the legal costs of incorporation and tax return filing requirements – prior to incorporation, only one tax return is filed: Personal Income Tax Return. After incorporation, there are two tax returns to be filed: Corporate and Personal Income Tax Return. Other tax filing requirements:
- GST/HST Returns – GST/HST filing is still required
- Payroll – Remittances and EHT/WSIB requirements if there are employees in the corporation
- Record Keeping – maintaining a full set of accounting books is required in order to produce corporate financial statements.
That’s a lot to take in. After all, there hasn’t been much change in terms of regulations in the past 18 years. You may find yourself wondering if incorporation is the right choice for you as a real estate professional or how you can even go about it. Depending on your personal and corporate goals, the answer to this is different for everyone. At Qmulus, we have years of experience within the real estate tax industry and know our way around these regulations. During our first initial consultation, we can figure out what your goals are and if incorporation is appropriate for you. If you want to continue down the path to incorporation, we are the tax experts to turn to. Schedule an appointment or give us a call at 647-476-2145 to get started.