Pursuant to the Real Estate Services Act (the “Act”), as of January 1, 2009, individual realtors may now form personal real estate corporations. Advice from professional advisors, such as Accountants and Lawyers, is extremely important to ascertain whether incorporation is right for an individual realtor. Every realtor’s situation is different and it is important to remember that tax/legal advice may vary greatly depending on a realtor’s individual circumstances.
There are important stipulations to be aware of at the outset, such as restrictions on directors/shareholders, specific name requirements and acceptable activities for these types of corporations.
1. Who can be a Shareholder/Director?
According to the Act’s Regulations, a corporation may be licensed as a personal real estate corporation if all the voting shares of the corporation are legally and beneficially owned by a single individual, who is the licensed realtor and the controlling individual. The licensed realtor must therefore also be the sole director and president of the corporation.
2. What can I call my corporation?
The legal name of the corporation must include the realtor’s name and the term “personal real estate corporation”.
3. Acceptable Activities of a Personal Real Estate Corporation
Personal real estate corporations are not allowed to “conduct any business other than the provision of real estate services and ancillary services directly associated with the provision of real estate services.” Therefore, a personal real estate corporation is restricted to providing real estate services and certain services which support real estate services. For example, a personal real estate corporation must not engage in the business of real estate development and may not hold real estate beyond that required by it to provide real estate services.
Advantages of Incorporation
There are many advantages of incorporating; tax deferral and limited liability are the main two.
1. Tax Advantages
When a corporation is brought into existence, a separate tax payer is created with its own tax rates. The tax advantage which the shareholder of a corporation with active business income will enjoy, is the ability to defer the payment of some income tax. A tax deferral is possible by retaining earnings in the corporation. The deferral can be significant, especially for a taxpayer in the top marginal tax bracket.
It is difficult to answer the very common question “How much do I have to be earning to make incorporating worthwhile?” This is something that must be discussed with an Accountant who can review a realtor’s income and outgoings in depth to ascertain whether incorporating can result in significant tax savings. Each situation is different.
2. Limitation of Liability
Liability protection is generally the main non-tax reason to incorporate, and is the main motivation for most incorporations to take place. While a sole proprietor or partner in a general partnership has unlimited liability to creditors of the business, shareholders of a corporation have no such risk.
That being said, it is important to keep in mind that pursuant to the Act’s Regulations, if a personal real estate corporation commits a professional misconduct or conduct unbecoming a licensee then the realtor themselves can actually be subject to discipline proceedings in relation to that conduct, as if the realtor had committed the conduct him/herself. Further, if a realtor commits a professional misconduct or conduct unbecoming a licensee then the personal real estate corporation can be subject to discipline proceedings in relation to that conduct, as if the personal real estate corporation had committed the conduct itself.
Disadvantages of Incorporation
1. Added Expense
Regulatory and Record keeping Requirements are greater for corporations than for other business models. These requirements often make owning and operating a corporation more expensive than owning and operating a business partnerships or sole proprietorship.
2. Separation of Finances
While incorporation provides significant protection of owners’ personal assets from repercussions of business downturns, it also means that a business owner is not allowed to tap into the corporation’s account for assistance in meeting personal debts.
Concluding Comments
These changes present an opportunity for realtors to enjoy the benefits of incorporation. This process should be thought through very carefully by each individual realtor as circumstances will differ. We would be more than happy to assist you in your business venture should you decide to incorporate. Please contact Vanessa DeDominicis directly for more information (250-869-1140; [email protected] ).
