Top 3 Ways PRECs Can Save Real Estate Agents Thousands in Taxes
Setting up a Personal Real Estate Corporation (PREC) is a smart strategy for Ontario real estate agents looking to save money and grow their wealth. A PREC allows you to benefit from lower tax rates, defer personal taxes, and implement income-splitting strategies. Here are three impactful ways a PREC can help you save thousands:
1. Lower Tax Rates and Delayed Personal Taxes
Earnings in a PREC are taxed at the small business tax rate, approximately 12.2% in Ontario, compared to personal tax rates that can go up to 53%. Additionally, you can defer personal taxes by leaving earnings in the corporation and withdrawing them in years when your personal tax rate is lower.
Example:
Imagine you delay $50,000 in personal income annually and invest it in the corporation at an 8% annual return over 10 years. After the investment period, you withdraw the funds:
Annual Investment After Corporate Tax: $43,900.
Total Investment Value After 10 Years (8% growth): $635,960.09.
By reinvesting at the corporate tax rate and deferring withdrawals, you can significantly enhance your savings and build wealth over time.
2. Income Smoothing
Real estate earnings can fluctuate significantly. A PREC allows you to spread income over multiple years, reducing your tax burden by withdrawing during lower-income years.
Example:
Imagine you earn $200,000 in one year but expect $0 the next year. Instead of taking all $200,000 as personal income, you leave $100,000 in the PREC. In the high-earning year, $100,000 is taxed at your personal rate, and $100,000 at the corporate rate of 12.2%. The next year, you withdraw $100,000 when your personal tax rate is lower.
Without a PREC: $200,000 taxed personally = $75,034.22 in taxes.
With a PREC: $100,000 taxed personally = $31,937.95 + $12,200 corporate tax + $31,937.95 personal tax in the second year = $61,937.95 total taxes.
Tax Savings: $13,096.27 over two years.
3. Sharing Income with Family
A PREC enables income splitting with family members, such as your spouse or adult children, who are in lower tax brackets. By making them shareholders or paying them for working in the business, you can reduce your family’s overall tax burden.
Example:
Imagine you earn $200,000 in one year and pay your spouse $75,000 for working in your real estate business. This income is taxed at your spouse’s lower personal tax rate. You keep the remaining $125,000 as your own income, taxed at your higher personal tax rate.
Without Income Splitting: $200,000 taxed personally = $75,034.22 in taxes.
With Income Splitting: $125,000 taxed personally = $35,479.83 + $75,000 taxed at your spouse’s lower rate = $14,857.90.
Total Taxes with Splitting: $50,337.73.
Tax Savings: $24,696.49.
Important Points:
Payments to family members must reflect fair market value for their work.
Dividends or salaries must comply with CRA rules to avoid penalties.
When implemented correctly, income splitting not only saves taxes but also shares financial benefits within your family.
Final Thoughts
A PREC offers powerful tools to optimize taxes and plan for your financial future. To maximize these benefits and ensure compliance, consulting a tax professional is essential.
At Realontax, we specialize in helping Ontario real estate agents leverage their PRECs for maximum savings and growth. Contact us today to start building a stronger financial future.
Disclaimer: This blog is for informational purposes only. The numbers in the examples provided are for demonstrative purposes and may not reflect your individual tax situation. Always consult a professional for advice tailored to your situation.