Realtors in BC have the ability to operate their business through a corporation and to therefore enjoy the advantages of a professional corporation. PRECS are governed by the Real Estate Services Act of British Columbia (part 10) and some additional rules that have been established by the Real Estate Council of British Columbia.
There are some really nice benefits to being incorporated but it is not for everyone. There are costs too. For example, one must incur initial fees to evaluate the decision and to then establish the corporation. On an annual basis, there are then also additional legal fees to maintain the Corporation and accounting fees to file additional tax returns such as the T2, T4, and/or T5. There are also additional licensing fees as the corporation and individual must both maintain licenses.
Still, you will find that many realtors are incorporated. This is mostly because of the tax benefits. Without a corporation, a realtor must pay personal income taxes on all of their income whereas when a realtor is incorporated, they are able to defer tax on any income that they are not spending in the year and possibly do some income splitting as well.
For example, consider a realtor that has earned $200,000 in commissions in a year and only requires one-half for their personal expenses. If the realtor were not incorporated, they would pay tax on the entire $200,000. The $100,000 that would otherwise go to become savings, would shrink down to $57,670 whereas if that realtor were incorporated, then their corporation would have retained $86,500. The $28,830 difference is the income taxes that would not have had to be paid on this income until later. Often, that later is very far later such as retirement or transfer of assets to the next generation and so this tax deferral is almost a tax savings.
These issues become even greater if that realtor is earning over $200,000, as Canada’s new government has imposed a 4% increase to that tax bracket starting in 2016.
Where a realtor has a family, spouse and children, these savings can become immense as the income tax that is paid on income used to cover personal expenses may also be reduced by way of income splitting. In these situations, the spouse and children, often through use of a family trust, will also receive shares in the PREC. Then, when cash is taken from the PREC to cover personal expenses, it will flow out as dividends to the realtor, spouse and children and will hence be taxed at far lower rates.
For example, if a realtor requires $120,000 of income for personal expenses, taxes on this would be approximately $32,000. If that income were instead withdrawn as $30,000 dividends by the realtor, spouse and two children, that tax would be nominal. Please not that this assumes that this is the sole source of income for the household, such as where the spouse is stay-at-home and the children are not employed and are perhaps in post-secondary education. Also, the dividends would only be given to adult children, to whom the dividends would need to be made available for, such as to cover the adult children’s educational costs and living expenses.
The above examples dramatically illustrate the benefits of the PREC for the realtor. There are still many more benefits. If you are considering whether a PREC is right for you, please contact us to arrange a consultation.