5 Benefits of Incorporating a Personal Real Estate Corporation in Canada
December 16, 2020 | Written by: Sohail Afzal
A PREC is a legal corporation that allows you to receive income and pay the expenses of your real estate business. A PREC is required to submit a separate income tax return to the CRA as it is a separate legal entity apart from the owners. Forming a personal real estate corporation in Canada may have certain benefits associated with it. If you want to establish a personal real estate corporation (PREC) in Canada, you alone will be responsible for all key decisions of your corporation. A PREC can own property, insurance policies, and make investments. The corporation may also be required to open up different program accounts of the CRA. Following are some of the important benefits that are associated with a PREC:
Tax deferral is one of the greatest benefits PREC offers real estate agents. If a real estate agent does not incorporate their business, all real estate income will be reported in their personal tax return which will be subject to a high tax rate. A PREC, on the other hand, pays only 13.5% of income tax if that income does not exceed $ 500,000. This means that if the real estate agent keeps his income in a PREC, not only can tax be deferred, but also tax money can be saved that would otherwise be paid in personal taxes. This tax deferral is only available to incorporated agents; unincorporated agents do not have the option to defer.
Another tax benefit of incorporating a PREC is income splitting. By transferring income from a high-income person to a low-income person, a real estate agent can save a significant amount of income tax. A PREC can issue a dividend to family members who have a low income, but for that family member, a PREC has one restriction, that is, a family member can only be non-equity participation.
Flexibility of Remuneration
Incorporation can give REALTORS access to different types of payment options, including salary, dividends, and bonuses. Your tax advisor can direct you to a particular combination that balances tax efficiency with other goals in your particular situation.
Lifetime Capital Gains Exemption
You can receive significant tax relief on the capital gains you realize on the disposition of certain shares of private companies. Every resident of Canada can apply for a Lifetime Capital Gains Exemption (LCGE) to shelter capital gains on the disposition of qualified small business corporation shares.
Non-Deductible and Partially Deductible Expenses
You can also benefit from a small tax reduction on certain business expenses that you incur and which are not fully deductible. Indeed, the fact that such expenses are incurred by the PREC means that the applicable tax rate is 12.5%, while the payment of these expenses individually means that the applicable tax rate is 53.53. %. So you can some amount if paid out of your PREC.
Please don’t hesitate to reach out to GTA Accounting if you are a realtor and you are looking forward to registering a corporation for the above-mentioned benefits. We will prepare all the documents and draft the articles of incorporation for your PREC.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.