You’ve written exams and hit the pavement, you’ve dealt with rejection, built momentum, hired staff, leased or purchased an office, put thousands upon thousands of kilometers on your car chasing clients, dealt with regulators and stakeholders. Finally, you’re starting to make some decent money.
You’re a realtor. But that paragraph above would describe any entrepreneur trying to make it big, right?
Well, that’s because, at least in my opinion, realtors are entrepreneurs. Professional entrepreneurs to be exact. Just like accountants, lawyers, doctors, and other similar professionals who go off on their own and have to build their business from the ground up. You have no safety net, no pension, no benefits, and until now, no tax benefits.
No tax benefits? That’s right, your earnings are taxed at your normal marginal personal tax rates just like anyone else. This isn’t the case with other professionals: they can incorporate.
Let’s look at the numbers.
Spoiler alert, there’s soon to be a solution, just read on.
In the example below, we will compare Mr. R, a realtor, to Mr. A, an accountant.
Both Mr. R and Mr. A are identical for all intents and purposes, other than the fact that Mr. A practices as an accountant via a professional corporation which allows him to defer paying tax on earnings he wishes to save and invest or re-invest in his business:
- Both earn $250,000 per year of net business income after expenses
- Both require about $95,500 after tax to fund their personal lives
- Both wish to reinvest all of their business’ retained earnings either back into their respective businesses or in a retirement portfolio
As can be clearly seen in the example above the incorporated professional has a major advantage over the unincorporated individual. In this case, the advantage comes from the incorporated individual’s ability to defer almost $42,000 of tax to a future date. This is an advantage that accountants, doctors, and lawyers have had over realtors for years because realtors can’t incorporate their practices.
What would you be able to do with $42,000? Invest in a new commercial unit for your business? New furniture? Marketing material? The list goes on and on. Now imagine compounding those savings over a period of 5 or 10 or 20 years. At a 6% annual rate of return over a 20-year period that advantage could lead to over $1.5 million.
Thankfully, the government of Ontario has finally introduced a new bill that, among other things, gives realtors the ability to incorporate and collect commissions through their corporations. This could lead to the very tax advantages mentioned above for high performing realtors.
Incorporation, however, is not a straight forward task. There are multiple considerations such as the transfer of a current sole-proprietorship to the corporation (watch out for the tax traps), the compensation to the individual realtor, new layers of regulation and potential tax pitfalls.
Never the less, we applaud the government of Ontario for taking the initiative to make things right and start the process that will lead to an even playing field for realtors.
As new details emerge, we will be keeping an eye out for you, and once the legislation has been finalized, we will be publishing a free starter guide for realtors explaining the full process of incorporation along with our top tips to best utilize a corporation in your practice. If you’d like to be one of the first realtors to get a copy of this guide please provide your email below and we will send you the update once it is produced.
Campanella McDonald LLP has been helping realtors, entrepreneurs, and real estate investors maximize their after-tax dollars since 2010. Our team of highly qualified CPAs are there to help you navigate the often-complex world of small business taxation. Contact us for more information.