Real Estate News

Real Estate News

Thousands of Ontario Agents Opt to Establish Personal Real Estate Corporations

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Nearly 13 months after the Ontario Real Estate Association (OREA) successfully lobbied the provincial government to permit personal real estate corporations (PRECs), uptake has been more than twice as high as initially anticipated.

Although doctors, lawyers, accountants, dentists, engineers and a host of other professions, have long been allowed to form personal corporations, realtors have been left out in the cold. Although OREA expected several thousand realtors would adopt the tool following its October 1, 2020, implementation, the association’s initial estimate has been blown out of the water over a year later. Among the reasons for its fervent adoption is that it lower agents’ tax burdens.

And for Tom Storey, 30, who formed a PREC in November, and whose girlfriend is six-months pregnant, it couldn’t have come at a better time.

“If you pay yourself as an employee of a corporation, you could choose the salary you’d like to pay yourself. For example, you could pay yourself enough to cover your living expenses and leave the rest of the money in your corporation, which is taxed at 13% instead of at a much higher rate personally, which can push close to 50%,” agent Tom Storey, a team lead with Royal LePage Signature Realty in Toronto, said of being able to defer taxes. “At some point you have to take it out of the corporation, but if you don’t need it now you can take it out later when you’re more financially sound.”

Personal Real Estate Corporations
Realtor Tom Storey

Tim Hudak, OREA’s CEO, was at the forefront of lobbying efforts, but even he didn’t realize how immensely popular PRECs would prove with the association’s membership, and he says that it speaks to the legislation’s necessity.

“We had initially estimated that somewhere in the neighbourhood of 3,000-4,000 real estate agents would adopt this tool, but after a year we’re pleased to see that roughly 10,000 have established personal real estate corporations,” Hudak said. “OREA had spent the previous 15 years lobbying the provincial government to give realtors the option of creating PRECs, and given how enthusiastic the uptake has been, it’s clear that this piece of legislation was long overdue.”

The reason it took so long, he added, had more to do with outdated red tape from a law that precedes incorporation becoming common in other professions than it did intentionally slighting agents and brokers. And now that the industry isn’t being taxed to the hilt, Hudak surmises that the retention of funds will drive innovation.

Personal Real Estate Corporations
Tim Hudak, CEO of OREA

“Now more money will stay within the real estate profession rather than going into government coffers through taxes, and this opens the door to innovation,” he said. “For example, don’t be surprised to see new technologies created; there will also be more job creation, which will bolster Ontario’s economy, and I wouldn’t be surprised to see companies release even more sophisticated real estate data analysis, to say nothing of the enhanced service quality that will benefit buyers and sellers.”

Enhanced professionalism was echoed by Storey, who believes agents who have created PRECs will be more cognizant of financial implications, and not just for tax deferral reasons. He suspects fewer agents will fly by the seat of their pants.

“I think, for the industry as a whole, it’s a great thing, not just because of tax savings but because it will make a lot more people treat it like a business. You’re going to have to figure out how you will pay yourself — will it be through dividends or a certain salary based on the tax you pay, and how many employees you pay? There are whole aspects that didn’t exist before we had [PRECs] that we now have to think about,” he said.

PRECs still have limitations, notably that the only income allowable in the corporation must be derived from sales commissions. If, for example, an agent wanted to purchase property under a corporation, they would have to open a separate numbered company, but that isn’t the reason PRECs were sought after in the first place.

“Whenever you can reinvest money from the revenue side of things back into the business, and ultimately into the industry, and find new ideas, that’s only going to be a good thing as far as innovation goes,” said Storey. “And for me, the biggest aspect is not being hit with taxes. From a cash flow perspective, when you run a business you can bring in a lot of revenue, but having a corporation set up with a bird’s-eye view, I make better decisions in my business and what I spend money on. Now I focus on the things I need to incorporate into my business.”

With a newborn expected around Christmas, that can only be a good thing.

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