Personal Real Estate Corporations in Ontario

Unlike other regulated professionals (doctors, lawyers, engineers, architects, dentists and accountants) who can incorporate their business, Ontario real estate agents are currently excluded from this group due to a technicality in the Real Estate and Business Brokers Act, 2002. But it looks like Ontario REALTORS are one step closer to being allowed to form personal real estate corporations.

Bill 104, Tax Fairness for Realtors Act, 2017, passed second reading in the Ontario legislature on March 23, 2017. If Bill 104 continues to move through the legislative approval process and receives Royal Assent, following third reading and a final vote in the legislature, it will become law in Ontario.

If passed, the bill 104 would permit realtors to form personal real estate corporations. This would enable real estate salespeople and brokers across the province to take advantage of the business benefits of incorporation.

Low Tax Rates and Tax Deferral Opportunities

Many tax planning opportunities available to other corporations and business owners would also be available to Personal Real Estate Corporation and the owners.

In Ontario, the top marginal rate is 53.53% on income over $220,000. As a Personal Real Estate Corporation, real estate agents would have access to the Ontario small business tax rate of only 13.5% on the first $500,000 of active income in 2018 for CCPC, and 26.5% thereafter. A significant tax deferral would easily be achieved if the real estate agent leave income in the corporation.

Income Splitting Opportunities

For some professionals, such as lawyers, ownership in their Professional Corporation is restricted to licensed professionals.However, it does not look like that would be the case with the Personal Real Estate Corporation. Bill 104 would allow for the issuance of non-equity shares to the family members of the realtor. As a result, Personal Real Estate Corporation can split income across family members by paying them a reasonable salary or issuing dividends.

Until Bill 104 passes into law, there will still be questions surrounding exactly how it will be implemented and what that will mean for real estate agents. Stay tuned with us.

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Tax on Split Income (TOSI Rules) – Impact to Dental, Doctor and Lawyer Professionals

The federal government has confirmed changes to tax rules that will restrict income splitting using private corporations. The changes, effective January 1, 2018, would expand the TOSI rules. The TOSI rules will generally apply to income from private business arrangements, such as dividends or interest paid from a professional Corporation.

Where the TOSI applies, the income is subject to the top marginal tax rate in the hands of the individual, and personal tax credits (with the exception of the dividend tax credit and foreign tax credit) are denied with respect to the amounts.

The TOSI measures include clear “bright-line” tests or safe harbours to automatically exclude individual family members. The exclusions are as follows:

  • The individual is over the age of 65.
  • The individual is over the age of 18, and he or she worked for the business for an average of 20 hours per week, in the present year, or in 5 non-cumulative preceding years.
  • The individual is over the age of 25 and owns more than 10% of the votes and value of the shares of corporation directly (not through a trust) and the business is not in the provision of services, and the corporation is not a professional corporation.
  • Individuals who receive capital gains from qualified small business corporation shares if they would not be subject to the highest marginal tax rate on the gains under existing rules.

Individuals aged 25 or over who do not meet any of the exclusions described above would be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate.



Tax Advices for Dentists, Family Doctors and Lawyers

As a practicing Dentist, Family Doctor and Lawyer, it may come as a surprise that the Canada Revenue Agency will be taking close to half of your hard earned money.  Did you know the marginal tax rate for income over $150,000 is about 47.97% and increases to 53.53% for income over $220,000?

Here are guidance and tax saving strategies for Dentists, Family Doctors and Lawyers:

First, set up a professional corporation.

There are three potential significant tax benefits of incorporating a professional corporation for a Dentist, Family Doctor and Lawyer:

  • Issuing salary or dividends to family members in lower tax brackets;
  • A tax deferral is possible by retaining earnings in the professional corporation;
  • The $800,000 capital gains exemption available for sale of a small business can only be claimed on the sale of shares of a qualifying corporation and not for the sale of a sole proprietorship or a partnership.

In Ontario, the combined federal + Ontario tax rate on the first $500,000 of active business income earned by a professional corporation is only 13.5% for 2018 and 12.5% for 2019. The average tax rate to earn the same amount of income personally is about 45%. The professional corporation provides a 30% deferral of tax leaving you with more cash to reinvest in your practice. Personal tax will be payable when funds are extracted from the professional corporation.

Secondly, pay reasonable salaries to family members in a lower tax bracket

If a family member performs administrative duties for the practice, you can pay him or her a salary as long as it is reasonable (i.e. comparable to what you would pay anyone else to perform the same duties).  If your family member is in a lower tax bracket, this would result in an overall tax savings.

If you would like to take advantage of these tax planning opportunities for your practice, contact us today.