In Manitoba, people in various professions have long enjoyed the advantages of incorporation. Dentists, doctors, and yes, lawyers have created corporations to help manage their practices for many years. Manitoba’s current legislation allows real estate agents to incorporate in the province by forming a Personal Real Estate Corporation (PREC).
According to The Real Estate Brokers Act, a broker may pay a commission, salary or other remuneration to a salesperson—more commonly referred to as a real estate agent or realtor—who is registered with the Manitoba Securities Commission. Thanks to a lesser-known exception to this rule, a salesperson may create a corporation to receive their commissions or remunerations without following the provincial registration requirements imposed upon realtors personally. PRECs do not need to be registered with the Manitoba Securities Commission.
However, Manitoba PRECs have requirements that must be followed. The corporation must:
Be careful not to confuse a PREC with a corporation used by a real estate investor to own real estate. Personal real estate corporations are designed for real estate agents and are only to be used as a vehicle to hold an agent’s remuneration. They cannot be used in other ways like real estate trading. Sorry, no house flipping through your PREC!
Speak to an accountant to see how other kinds of corporations may benefit from real estate investments.
PRECs do not usually allow a realtor to claim more tax deductions than if they operated without a personal corporation, but they do offer other advantages.
Of the many reasons why a real estate agent may want to incorporate, probably the most appealing is the potential for tax deferral. A realtor who uses a corporation to collect their earnings may be able to keep a significantly higher portion of those earnings compared to a realtor who pays personal income tax on those same earnings.
The basic corporate Manitoba income tax rate for 2020 is 12 per cent, while the personal tax rates can vary from 25.80 per cent to 50.40 per cent depending on the situation.
Initially, profits left in a personal real estate corporation would only be subject to the lower corporate tax rate. It is only once these profits are withdrawn that they would be subject to personal tax, likely at a lower rate than if they were earned outside of a PREC.
Another pro for establishing a personal real estate corporation is that they may allow realtors to benefit from the lifetime capital gains exemption.
Realtors who wish to take advantage of lower tax rates and have questions about the lifetime capital gains exemption may want to speak with their accountant to see exactly what kind of tax savings apply to their situation.
A realtor’s family members can be shareholders of a personal real estate corporation. This means in some situations, it may be possible to take advantage of income splitting benefits made possible by a PREC. Recent rules regarding tax on split income (TOSI) have limited the number of eligible cases that can benefit from income splitting, also known as income sprinkling. However, it’s still possible for realtors in certain scenarios to enjoy savings from income splitting.
Professional corporations such as PRECs allow realtors to operate with limited liability. Incorporating a real estate business means if a realtor is sued, they will only be liable for the amount they invested in the business. Personal assets would be protected, with some exceptions. Realtors who use a PREC and defaulted on a loan, for example, would only have their business assets at risk, saving their personal assets from potential creditors.
Manitoba PRECs are required to enter into a contract with a broker, whereby the broker is assigned the liability for the corporation’s acts and omissions. A corporation does not assume any acts and omissions liability.
In addition to the positive tax effects generated by personal real estate corporations, the corporation will successfully limit a realtor’s liability in many cases, increasing their appeal.
Creating a corporation does mean there will be some additional overhead and costs. Incorporation fees, higher accounting costs, increased record keeping requirements, annual returns and maintenance costs, and other regulatory compliance requirements are some of the disadvantages of incorporating and should be considered by any realtor thinking of setting up a PREC.
It’s important to note, the same broker must be used by all of the corporation’s realtors. Two family members working with different brokers are not permitted to be associated with the same corporation. This means one person may be required to withdraw from the corporation or form another PREC themselves. Even with limitations such as this, the advantages of incorporating will outweigh the drawbacks in many cases, especially in situations where realtors can afford to leave some of their earnings in the corporation.
We recommend realtors interested in incorporating seek professional accounting and legal advice first to ensure incorporation is their best choice.
At TLR Law, our experienced corporate team is ready to evaluate your needs and explore if incorporating is the right choice for you. We will guide you through the process of establishing a new corporation and then help you maintain it into the future. Contact our office for more information. Schedule your consultation today.