PROJECT PERSONAL REAL ESTATE CORPORATIONS A LOOK AT THE POTENTIAL TAX SAVINGS 778-847-6261 JEFF BORDEN, BBA CPA CGA PHONE CLIENT 1
Sole Proprietor Commissions Realtor • 100% of income is personally taxable • High income will be taxed at high rates • Income > $100k = 40.7% tax • Income > $200k = 47.0% tax • No income splitting available 2
PREC Commissions PREC Realtor • Control personal income to cover cost of living • Surplus income left in PREC not taxed at high rate • PREC pays small business tax of just 13% 3
PREC Realtor Commissions PREC Spouse / Family • Income splitting is now available • Utilize additional family members' (age 18+) basic personal exemptions and lower tax brackets to reduce total tax payable 4
Cost of implementation: One-time Annual Incorporation & legal filings $1,500 $400 REC BC Annual License & E&O insurance $665 (paid bi-annually) Accounting fees: financial statements & ~ $1,250 corporate tax return $1,500 ~ $2,000 5
$100k Comparison: Sole PREC Proprietor Net income (revenue less expenses) $100,000 $100,000 $500 $2,000 Accounting, legal and extra licence & E&O Taxable income $99,500 $98,000 Personal income tax $22,000 $13,300 - $3,185 Corporate income tax Total after tax cash flow $77,500 $81,515 Additional free cash from incorporation $4,015 * Based on salary draw of $73,500 to leave personal after tax income of $60,000 ($5k/mo) 6
$150k Comparison: Sole PREC Proprietor Net income (revenue less expenses) $150,000 $150,000 $500 $2,000 Accounting, legal and extra licence & E&O Taxable income $149,500 $148,000 Personal income tax $42,400 $13,300 - $9,685 Corporate income tax Total after tax cash flow $107,100 $125,015 Additional free cash from incorporation $17,915 * Based on salary draw of $73,500 to leave personal after tax income of $60,000 ($5k/mo) 7
Income Splitting - $100k: Sole PREC Proprietor Net income (revenue less expenses) $100,000 $100,000 $500 $2,000 Accounting, legal and extra licence & E&O Taxable income $99,500 $98,000 Personal income tax $22,000 $2,600 - $8,515 Corporate income tax Total after tax cash flow $77,500 $86,885 Additional free cash from incorporation $9,385 * Based on splitting income $32.5k salary plus $30k dividend to spouse to leave personal after tax income of $60,000 ($5k/mo) 8
Income Splitting - $150k: Sole PREC Proprietor Net income (revenue less expenses) $150,000 $150,000 $500 $2,000 Accounting, legal and extra licence & E&O Taxable income $149,500 $148,000 Personal income tax $42,400 $2,600 - $15,015 Corporate income tax Total after tax cash flow $107,100 $130,385 Additional free cash from incorporation $23,285 * Based on splitting income $32.5k salary plus $30k dividend to spouse to leave personal after tax income of $60,000 ($5k/mo). 9
Points to consider • You can invest the retained • Requires a new GST earnings the same as you number would invest personally (ie: • The more income left in the stocks, bonds, mutual PREC, the larger the tax funds), subject to RECBC savings restrictions: • The higher the income, the • Cannot invest directly larger the tax savings in real estate other than property used to operate • Spouse and family real estate business members may only own non-voting shares • Section 85 tax election may be required (if transferring • Use a lawyer to set up the existing assets to new PREC corporation corporation) 10
Investing in Real Estate • Realtors have an information advantage and enhanced access to information about real estate • Real Estate Council does not allow real estate to be held within a PREC (conflict of interest concern) • Income from a PREC can still be used to invest in real estate by setting up a Holding Company 11
Investing in Real Estate Realtor Realtor Holding Company PREC X PREC Investment Property Investment Property 12
Using a Holding Company • Holding Company can own non-voting shares of PREC (use a separate class of shares) • PREC can pay inter-company dividends to HoldCo tax free • Cash in HoldCo can be invested without restrictions • Cash paid by dividend to HoldCo is permanently removed from any business liabilities of the PREC • On retirement, PREC can be wound down, HoldCo maintained to continue holding assets. • Additional set of incorporation, legal and accounting fees (annual accounting fees lower than for an active operating company) 13
Running your business • Financial records: • Record all business income and expenses • Keep separate bank accounts, use separate credit cards - this will make your record keeping much more e ffi cient! • Mileage log - required! or CRA may disallow expenses • Monthly payroll reporting and remittances • RECOMMENDED: QuickBooks Self-Employed • Online access from anywhere • Mobile app with mileage tracking 14
ALWAYS GLAD TO ANSWER YOUR QUESTIONS: JEFF BORDEN, BBA CPA CGA CHARTERED PROFESSIONAL ACCOUNTANT 114-175 WEST 1ST STREET NORTH VANCOUVER BC. V7M 2N9 778-847-6261 JBORDEN@BORDENCGA.COM PROJECT PERSONAL REAL ESTATE CORPORATIONS A LOOK AT THE POTENTIAL TAX SAVINGS 778-847-6261 JEFF BORDEN, BBA CPA CGA PHONE CLIENT 15
Recommend
More recommend
