Should you incorporate your real estate business?

by Emina Tankovic and Cameron Oneschuk

Recent changes to The Real Estate Services Act (Manitoba) will allow provincially-registered real estate agents, brokers, and property managers to incorporate as of January 1, 2022. 

Under the proposed regulations, individuals can incorporate and register their real estate service business to form a “personal real estate corporation” (PREC).

However, just because you can incorporate doesn’t necessarily mean you should. The potential costs and benefits to incorporating will vary depending on your business’ unique needs, risks, and cash flow levels.

Advantages and disadvantages to incorporating

Following are some accounting and tax considerations to discuss with your Business Advisor.

1. Administration steps and compliance costs

A sole proprietorship (i.e., your current unincorporated business) is the simplest business structure to administrate. Incorporating will require both immediate and ongoing compliance costs, as well as administrative upkeep.

2. Income taxes

From an income tax standpoint, there should be theoretically little — if any — change to the amount of income tax you’re required to pay. The Canadian tax system is structured so the combined corporate and personal tax paid on active business income earned through a Canadian Controlled Private Corporation (CCPC) should be approximately equal to tax paid on income earned directly by an individual. A PREC would likely be a CCPC.

3. Tax Deferral

A key benefit to carrying on a business through a corporation is the ability to access tax deferral. Delaying personal tax paid on corporate distributions (such as shareholder dividends) allows corporations to invest capital more cheaply and pay off debt faster.

For example, a corporation eligible for the small business deduction would pay nine percent tax on its active annual business income up to $500,000, and 27 percent thereafter. This would leave $0.91 for every dollar of income to spend on acquisitions, debt repayments, and other business needs — as opposed to $0.496 for every dollar of after-tax earnings for a sole proprietor in the highest tax bracket.

However, the tax deferral is only available if you regularly leave after-tax profits in the corporation. A corporation may not be tax effective if you’ll need to access most or all the corporate cash for the foreseeable future.

4. Buying power

Buying power is usually greater in a corporation due to the tax deferral discussed above. You can use the greater after-tax dollars to fund retirement plans and build your business. But, again, the power rapidly fades if you regularly pull profits out of the corporation.

5. Use of business losses

A business may incur losses which you could access immediately as a sole proprietor. Incorporating traps those losses in the corporation — though you could use corporate business losses to offset future corporate business income.

6. Compliance

Compliance with frequently changing tax rules is critical whether you’re a sole proprietor or corporation. As a rule, corporate tax rules tend to be the more complex of the two — and therefore require greater assistance and support from a qualified Business Advisor.