How to Effectively Split Income Using a PREC in Ontario

A Personal Real Estate Corporation (PREC) is a valuable financial tool for real estate agents in Ontario. One of its key benefits is enabling income splitting, a strategy that can significantly lower your family’s overall tax bill when implemented correctly under Canada Revenue Agency (CRA) guidelines.

What is Income Splitting?

Income splitting involves sharing your income with family members who are in lower tax brackets. By redistributing income, you reduce the total taxes your family pays. For example, through a PREC, you can pay dividends to your spouse or children, allowing them to pay taxes at their lower rates instead of yours at a higher rate.

How a PREC Facilitates Income Splitting

A PREC simplifies this process by permitting family members to hold non-voting shares. These shareholders can receive dividends taxed at their individual rates. This method also avoids Canada Pension Plan (CPP) contributions on distributed income, giving you more flexibility in managing and allocating profits.

Key Rules for Effective Income Splitting

1. Understand TOSI Rules:
   The CRA’s Tax on Split Income (TOSI) rules are designed to prevent unfair tax advantages. For family members aged 18-24, dividends are taxed at the highest rate unless they:

   • Work at least 20 hours per week in the business, or

   • Own at least 10% of the voting shares in the PREC.

   For family members over 25, these rules are less restrictive, especially if they contribute to the business actively.

2. Set Up the Right Share Structure:
   Usually, you retain voting shares to maintain control while family members hold non-voting shares. Consulting with a lawyer or accountant is essential to ensure the share structure complies with all legal and tax regulations.

3. Make Fair Payments:
   Payments to family members must be reasonable and reflect their contributions. The CRA scrutinizes these transactions closely, and excessive payments can lead to penalties.

4. Choose Between Dividends and Salary:
   Dividends are often more tax-efficient since they are exempt from CPP contributions. However, salaries might be better if family members actively work in the business, as salaries generate Registered Retirement Savings Plan (RRSP) contribution room.

5. Maintain Accurate Records:
   Detailed documentation, including work logs, dividend payments, and shareholder agreements, is vital to support your income-splitting strategy and protect against CRA audits.

Advantages of Income Splitting

• Tax Savings: Reduce your family’s overall tax liability by shifting income to lower tax brackets.

• Flexibility: Customize the timing and amount of income distributions to suit your financial goals.

• Wealth Growth: Reinvest tax savings into growing your business or securing your family’s financial future.

• Future Planning: Help family members save for retirement, education, or other long-term objectives.

Is Income Splitting Right for You?

Income splitting is not a one-size-fits-all solution. Its effectiveness depends on your family’s financial situation, the roles family members play in your business, and their current income levels. A personalized plan ensures compliance with CRA regulations while maximizing benefits. Consulting an experienced accountant can help tailor the strategy to your unique needs.

Final Thoughts

Leveraging a PREC for income splitting is an excellent way for Ontario real estate agents to minimize taxes and strengthen their financial planning. Success requires thoughtful planning, strict adherence to CRA rules, and proper execution. With a well-structured plan, you can enhance your tax position and secure your family’s financial future.

At Realontax, we specialize in helping real estate professionals unlock the full potential of their PRECs. Our team offers expert advice on income splitting and other tax-saving strategies. Contact us today to see how we can support your business and financial goals.

Disclaimer: This blog is for informational purposes only and does not constitute legal or financial advice. Please consult a qualified professional for advice tailored to your specific circumstances.