Towards the end of 2020, real estate agents in Ontario were given the “OK” to professionally incorporate with a Personal Real Estate Corporation (PREC).
Anyone considering incorporating should only do so with the consultation of their accountant, lawyer and real estate brokerage.
Below I’ve compiled 4 SCENARIOS where you might strongly consider incorporating as a realtor (if you haven’t already)…
SCENARIO #1: When you want to build your portfolio to 5 or more rental properties…
Reason A – Using corporate income money vs. personal income generally goes further. Many realtors pay 30-50%+ income tax personally, but Ontario corporate tax is in the low teens.
Let’s say my income tax rate was 35% and my corporate tax rate was 12.2%… if I showed $100k income through my corporation, rather than personally… I’d have $22,800 more post-tax dollars (that I could use for an investment property down payment).
Reason B – When buying investment property personally, I need to show enough personal income to service the additional debt from the investment property mortgage (minus the allowable coverage ratio portion from the rental income). Also, most financial institutions have a maximum number of personal mortgages they will allow per borrower; the majority are 5 or fewer.
But when I buy investment property through my corporation, it’s a commercial loan product that uses the income from the asset to service the debt, and there’s no limit to the number of loans or properties as long as the portfolio meets their debt service coverage ratios. (DSCR mortgages).
HOWEVER, there are two main downsides with these DSCR (commercial) mortgages, I find: they are typically at a higher interest rate, and they are not as simple to refinance as a personal (residential) mortgage.
SCENARIO #2: When you live on less than you make (consistently)
If you consistently live on substantially less than you make, you can benefit from paying a lower average tax rate and paying yourself a steady wage or salary from the corporation.
This can help average out the household income rollercoaster we often experience in sales, where we may follow up one of our best years with our worst (or vice versa).
For example, if I made $250k in GCC in 2022 but only paid myself $120k salary from the corporation, the additional $130k would have been retained in the corporate account, and less tax would likely have been paid on that portion. And if in 2023, I only made $80k in GCC, I could still pay myself that same $120k salary so that my lifestyle didn’t have to change drastically with the market fluctuations.
(There are also ways to do this with RRSPs if you’re not sure if incorporating is right for you and you have sufficient contribution room).
SCENARIO #3: When you hit +$250k GCC annual production (consistently)
If you consistently make +$250k annually, you pay a lot of tax, period.
Work with an accountant, lawyer and financial planner to come up with a plan that makes sense for your personal scenario… but be careful of lifestyle creep! Read scenario 2 again. If you can’t live on less than you make, then it won’t be of benefit. It costs most agents at least a few thousand dollars per year in accounting and legal fees for their annual tax filings and minute-books.
SCENARIO #4: When hiring staff or buying life insurance
You may find it easier to run a larger real estate sales business when incorporated vs. personally, especially when you have multiple employees. Whether you’re incorporated or not, you should separate your personal and business finances, and things like payroll and filings only get more complex when you have multiple employees.
Also, if you’re running a business of this scale, it’s no longer just a sales career…
You are going to need to plan tax efficiency and succession. If you have children and/or debt that you’d like covered if you were to pass, a whole-life insurance policy paid for by the corporation can be a component of a well-advised plan.
Please don’t take my word for it; seek independent, third-party, professional legal and tax/accounting/financial advice. These are just observations I’ve made, having gone through the process myself and talked with many professionals about.
Cody Kraus
Broker | Owner
c: 519.322.7105
e: cody.kraus@century21.ca
The information provided on this blog is not intended as professional advice and should not be substituted for the guidance of a qualified professional. While we strive to provide accurate and up-to-date information, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained on the blog for any purpose. Any reliance placed on such information should be independently verified.
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