Why Incorporation is the Way to Go for High-Earning Realtors

It was nice spending time meeting so many great people at Realtor Quest 2017 and the Rock Star Inner Circle member event.

real estate tax book

Proof copy of my book just arrived this week! So excited that we can release it soon!

Despite the business of my schedule last week, I managed to take my Sunday off with my two lovely kids. Robin asked me why she had to say, “Happy Mother’s Day” to all her grandmothers. She asked, “are they mommies too?” I laughed.  😊  This is why kids are cute.  

In honour of this Mother’s Day –

My client, who’s a single mom with twins working at one of the biggest professional firms, said that she appreciated this blog and she said that I was inspiring.  

It was a nice complement, but she’s the one that’s inspiring me!  She has two toddlers.  She has a demanding job that requires her to work downtown.  She commutes every day for over an hour to work.  She has no other help.  

She’s the one that’s inspiring me!  If she can do it, I have no right to complain about anything.  I’ve got lots of help and support around me.   

So happy mother’s day to all the mommies out there that are doing this motherhood thing all by yourself.  You all inspire me!  

Last week, one real estate investor asked me why I am such a big proponent to incorporate, while some other accountants out there would advise their clients otherwise.  

The truth is, it all depends on your personal situation.   

For me and many of my clients, you already have small businesses, incorporation allows you to invest faster and provide legal protection.  Most importantly, it provides all sorts of tax planning flexibilities and possibilities that being a sole proprietor would not.  

Since this real estate investor is also a realtor and I was at Realtor Quest this past week, let’s see how a realtor can build his retirement fund using a real estate portfolio with corporations.

Currently, real estate agents in Ontario are not allowed to incorporate and receive commissions through corporation.

Recently, a couple of local MPPs had already brought a bill to Parliament to allow realtors in Ontario to incorporate.  

The good news is that the bill has received overwhelming support by all the political parties. At this time, the bill was sent to a subcommittee for more hearing. 

The sad news is that it can take years before this bill gets passed, given that our government has other priorities in their agenda.  They have limited time and resource to pass all the bills.

What if you don’t want to wait for this bill to pass?  What can you do?  

Many large brokerages have programs assisting their top performers to incorporate using an alternative strategy.  

To do that, you must become a real estate broker and you need to get approval from your brokerage to assist you.

In essence, you own your own real estate brokerage in the corporation.  Even though you may only have one person in your brokerage, you own your entire realtor business in a corporation.  

You pay only 15% corporate tax within the corporation.

Yes. 15% only.  

Advantage of incorporating your realtor business

  • 15% income tax rate on your net realtor income (as opposed to most people being taxed at 25% to 35% average personal tax rates)
  • Tax deferral opportunities which allow you to invest tax savings to real estate portfolio and build your retirement funds within the corporate structure
  • Income splitting opportunities with lower income spouse and lower income family members.  (See my blog post “How the rich become richer” – same concept applies to realtor incorporation)

Disadvantages of incorporation your realtor business

  • Currently Ontario agents are not allowed to incorporate.  You need to jump through hoops, including, becoming a real estate broker to incorporate.
  • Additional registration fees are required with real estate boards as brokerages.  For example, if you belong to Toronto Real Estate Board, a one time registration fee to be a real estate brokerage is $5K.  
  • Additional administrative costs required to maintain the brokerage. You will have to pay an additional fee to your brokerage if they agree to assist you in setting up your own mini-brokerage.   Usually a monthly fee is applied.
  • Additional setup costs and accounting fees for the corporation.  Corporation setup is $2,000 and there can be accounting fees ranging from $1,500 to $3,000 for your corporation.
  • Additional compliance requirement by Real Estate Council of Ontario (RECO) as now you own your brokerage. Distinct set of standards apply to your corporation.  

So with these many disadvantages, why would I still recommend realtors to incorporate?

Most of the downside of incorporating your own mini-brokerages all come down to the cost associated with it.

For someone who’s making $80,000 net income from realtor business, your tax savings alone in the first year is $5,900.  Enough to cover the one time TREB registration fee.  

If you net $100K, your first year saving can be over $10,000 in the first year.  

For one of my clients who is earning 6 figures from their daytime jobs, their tax saving can be significantly different.  

Assuming the taxpayer is earning $150K from his daytime job, with a net realtor income of $50,000 inside a corporation, he can save over $12,500 even after accounting for all the additional costs.  More than enough to cover all the initial cost of setting up and registration.  

Not bad, isn’t it?

Of course, if you are the high roller realtors who earn way more than a net of $70K, the tax savings can be a lot more substantial.  

It also allows you to build a rental portfolio and your retirement fund in this corporate structure.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
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