British Columbia is the first Canadian province to allow individual real estate licencees to form personal real estate corporations (“PREC”). Under the Real Estate Services Act  and the Real Estate Services Regulation  realtors can take advantage of the benefits of incorporation in a manner similar to dentists, accountants and lawyers. Key advantages and disadvantages as well as the requirements of incorporating a PREC are briefly discussed below.
For licensed realtors the tax advantages of incorporating a PREC include the following:
- Tax Deferral - Licensed realtors who generate more commissions than required for their needs may retain earnings within a PREC. Taxable income of a PREC is taxed in the year earned at the low corporate tax rate of 13.5% on the first $500,000 of taxable income and 26.5% thereafter. These rates reduce in 2012 to 11% and 25% respectively. This compares favourably to the tax rate for individuals of 43.7% on taxable income over $127,021.
- Tax Savings Through Income Splitting - The PREC may employ and pay salary to family members such as a spouse, common-law partner or child for services performed by such persons. More importantly, the PREC may issue a separate class of “dividend-sprinkling” shares to family members (or a trust for family members) that allow dividends to be paid to the family members without contribution of effort by the family members. Income earned by family members may be taxable at lower marginal rates than if earned directly by the licensed realtor, which would result in a reduced overall family income tax bill.
- Deductions for Business Expenses - Deductible business expenses are not limited to the amount of commission income earned or the other limitations imposed on sale expenses of commissioned employees. Rather, the PREC’s income for tax purposes is its profit, which is generally the sales commissions less reasonable business expenses.
There are legal and tax considerations that can be pitfalls for the unwary including the following:
- Personal Services Business – A licensed realtor who is the voting shareholder of the PREC and who would be an employee of another entity but for the existence of the PREC would be considered to be operating a “personal services business” (“PSB”) with adverse income tax consequences. A PSB is not entitled to the preferential lower corporate income tax rates, and the deductibility of expenses is generally limited to remuneration paid and the cost of benefits and allowances provided to the incorporated employee, certain expenses of selling property and negotiating contracts, and legal expenses to collect accounts for services rendered.
- Attribution and Kiddie Tax – Any PREC that includes family members must be established with the attribution rules in mind. For instance, the attribution rules could attribute dividend income incurred by a family member to the licensed realtor in certain circumstances where the licensed realtor transfers property to the PREC (including the realtor’s existing business). As well dividends paid to children before the year in which they turn 18 on shares of the PREC will be subject to tax at the top marginal tax rate, reduced only by a dividend tax credit (effective tax rate of 33.71% on non-eligible dividends). This is as a result of the rules for split income, which is commonly referred to as the “kiddie tax”. In this way, opportunities for income splitting with minor children are reduced.
Licensed realtors should also consider:
- Costs of incorporating a PREC include legal costs (approximately $3,500 depending upon such factors as the nature of the incorporation, share structure and assets to be transferred).
- The PREC will require the preparation of financial statements and an additional tax return, generally performed by an accountant.
- The PREC must account for payroll source deductions for its employees and Harmonized Sales Tax (“HST”) for commissions charged.
- The licensed realtor, as the sole officer of a PREC, may be personally liable for any source deductions or HST that the PREC fails to remit.
- A PREC is generally required to be registered for WCB.
- An additional city business license and real estate license is required for the PREC.
- A separate bank account for the PREC is required.
The licensed realtor may be engaged and paid by a PREC to provide real estate services if the following requirements are met:
- The licensed realtor is the sole voting shareholder, director and president of the PREC (and there are no other officers).
- Each non-voting share is owned by either the licensed realtor or certain affiliated persons, being the spouse, common-law partner or child (the “family”), a corporation whose shares are beneficially owned by the licensed realtor or his or her family, or a trust all of the beneficiaries of which are the licensed realtor or his or her family.
- Each of the realtor and the PREC have a real estate license.
- The licensed realtor is “engaged” (employed or acting as an independent contractor for the PREC).
- Any other persons engaged by the PREC are not licensees (such as assistants).
- The PREC’s only business is the provision of real estate services and directly associated ancillary services.
- The licensed realtor and the PREC comply with the Real Estate Services Regulations.
- The legal name of the PREC includes nothing other than, the legal name, a short form of the legal name or the licensee name of the licensed realtor and the term “personal real estate corporation”.
- The PREC must be licensed to the same brokerage as the licensed realtor and must be engaged by the same brokerage to provide real estate services.
Licensed realtors may have several good reasons to incorporate a PREC. Incorporating a PREC is a good strategy for minimizing of income tax for a licensed realtor who can retain income in the PREC or can benefit from income splitting. However, a PREC is not right for everyone. Licensed realtors should consult with qualified legal counsel in order to determine whether or not they are in a position to take advantage of the PREC structure in their individual circumstances.