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Why You should Incorporate Your Real Estate Practice

Real estate agents are now to allowed to create their Personal Real Estate Corporation (PREC) in Ontario  Following reason are why you should take advantage of this long overdue privilege.

Tax deferrals:

The earning that corporation makes is subject to its own tax rates. These tax rates are less than highest marginal tax rates of let’s say 50%.

Normally the highest marginal tax rates kick in at $100,000, this means any income above that threshold would be taxes at 50%.

Now let’s assume you made $200,000 as a non-incorporated real estate agent, your tax in excess of the $100,000 is %50,000.

Now, let see how much you can defer taxes as an incorporate real estate agent. The excess $100,000 would stay in the corporation and pay corporate tax fees of let’s assume 15%. Which is $15,000 in 2021 this rate is at 13.5%.

So the tax deferral is $50,000 -$15,000=$35,000 also let’s assume that you repeated this for 10 years. You deferred $350,000 of taxes. This is significant.

Bonus and its immediate effect on Corp income

When a corporation declared a bonus, normally at year-end, it is allowed to expense the entire bonus amount in one shot.

Here is an example, let’s assume your Personal Real Estate Corporation (PREC) in 2020 has 60,000 net corporate income. You can leave in the corporation and pay the assumed 15% taxes, or we can issue a bonus of $60,000 at your year-end. So the corporation’s net income for 2020 would be nil. The issuance of the bonus immediately reduced the net income to zero, your own personal income for 2020 would also be zero since the bonus wasn’t earned in 2020 and will be earned in 2021.

One thing to remember is the incorporation will have 180 days which is equivalent to 6 months to pay this bonus in a form of payroll.  Which is great, in year 2021, you would have a T4 for at least 60,000. This as you know is needed for banks in Canada when determining your income for mortgage purposes.

HST calculation through the corporation

I believe running the business under a corporation would create an immediate structure and discipline. The corporation would have its own bank account, accounting system to keep everything inline, organized, structured, and cleared.

These disciplines when implemented properly would have an immediate impact on HST. We always advice our clients to create a trust account for the HST and transfer any HST collected.  You will never experience the paid of not having any money to pay the HST since the funds have never being touched.

This helps your cash flow.

To help and empower your discipline, we recommend using cloud accounting software mainly QuickBooks online. Cloud accounting powers will enable you to manage your business faster, easier, smarter and better.

Limited liability

The incorporation to the extent of professional liability and law would have a limited liability in case something goes wrong.

Mindset

Once we have created an incorporation and know that are is now a discipline and structure to have a strategy to pay taxes and have a structured and organized accounting system, we feel free and less afraid of making more money and creating more wealth.  When this fear or any fear is removed from our mind, our potentials would soar, and we can dream more and fulfill them.

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Monday, 22 April 2024

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