Contributor: Pension lawyer Jean Pierre Laporte, BA, MA, LLB. (Jp.laporte@integris-mgt.com)

Successful REALTORS® who generate significant commission income will eventually face a decision: should they incorporate a Personal Real Estate Corporation (PREC) or keep things as they are and report commissions as personal income?

Here’s an overview of the key tax considerations for each option.

When a Realtor is paid commission income directly by their brokerage, that income is reported on their personal tax return reflected on a T4A slip.

Canada’s progressive income tax system means lower tax rates apply to the first portion of income, while rates increase as income rises. For example, the first $20,000 of commission income is taxed at a much lower rate than amounts earned once total income exceeds $220,000, where the combined tax rate can surpass 50 per cent.

While tax laws do contain some deductions for certain expenses incurred in generating this commission income, they are quite restrictive.

When you create a PREC, you create a separate taxpayer, the corporation. Commission income is paid directly to the PREC, making the PREC now subject to tax on this “active business income.”

When the PREC pays a salary to its employee, who is you, the Realtor/president of the PREC, the amount paid out in the form of salary is an expense to the PREC and reduces the corporate taxes the company would have had to pay.

Unlike individuals, small business corporations (sometimes referred to as Canadian Controlled Private Corporations or CCPCs) are taxed at the same rate on every dollar up to a certain threshold (typically $500,000). After that, the next dollar above that cutoff is taxed at a higher, “general” tax rate.  

Taxes saved: $188,587

Of course, these tax savings are partially illusory because the Realtor needs to live on something – and that something is typically a salary or a dividend paid out by the PREC. For salaries, this income is subject to the individual's graduated tax rates. 

For dividends, the PREC must first pay corporate tax on it when they pay it out. The individual must then pay personal tax on it after receiving it.  Depending on how much is paid out, this tax advantage could be partially or fully eliminated.

However, it’s easy to see that if you don’t need to spend all the commissions you earn, the PREC provides a tax-sheltering opportunity.  

From a pension perspective, the employment relationship and the T4 paid by the PREC to the Realtor is what makes the creation of a pension plan possible. 

Next week, we’ll look at how taking compensation as salary compares with taking it as dividends.