This is a longer blog than usual. I have added a summary of the details that you will find in this blog:
- Details about Bill 104 Tax Fairness For Realtors Act, 2017
- Link to share the blog with clients, family and friends to gain support and vote YES for Bill 104: https://goo.gl/qGpZYn
- How to set up an incorporation if the bill is passed
- Tax saving strategies for agents if bill is not passed
- A link to enter the raffle for a free designation for you or your assistant: https://goo.gl/A0MDfM (The raffle prize is one of 20 free designations to Ontario agents, ending April 7th)
- Promo code to receive $50 off any designation: bill104 (Promo starts March 20th and ends May 1st)
- Direct link To Support Bill 104: http://realtortaxfairness.ca/
Ontario agents are steps away from making a historical change in the way they structure their businesses. Member of Provincial Parliament (MPP) Todd Smith introduced Bill 104, Tax Fairness for Realtors Act, 2017, for the third time. This act, if passed, will essentially allow real estate agents in Ontario to incorporate their businesses, rather than act as an independent contractor. What does this mean? Less tax. Realtors who generate a higher income annually will benefit the most from the change, as they are moving into a different tax bracket. Currently, in the highest tax bracket, agents are paying 46% tax compared to only 16% if they were able to incorporate their business. This means that if you make $137,000, you will pay $63,000 in taxes instead of $22,000. Tax Fairness for Realtors earned its name by providing examples of other provinces, such as British Columbia, Alberta and Quebec, all of which allow their real estate agents to incorporate their businesses. In addition, other industries such as accountants, lawyers, and mortgage financers are all allowed to incorporate their businesses as well.
It has been speculated that the CRA has focussed on auditing realtors, especially in the GTA, combing through details for any areas of error or unpaid taxes. Leaving many disgruntled from this treatment, agents have felt forced to find loopholes to retain their earnings, without using illegal means. For example, real estate teams have structured their business to operate as independent brokerages within their current brokerage to salvage their earnings. Other agents have redirected their earnings to claim lower incomes, and pay less tax. A viable solution to such extreme measures that agents feel forced to pursue, would include amending REBBA 2002, which allows for more flexibility for agents to structure their businesses the right way.
Support for Bill 104 has been communicated to the public in many ways, all in the interest of educating Ontario residents as to its contents and effects. Several agents have taken the initiative to share a link to http://realtortaxfairness.ca via social media, in hopes of gaining still more traction.
For those agents who support the bill and have yet to contribute to the cause, you can simply share a link with your community on any social media platform. (http://realtortaxfairness.ca/). For those who are interested, I have also written a blog aimed towards the general public, dedicated to this topic, explaining why agents require support. In addition to providing the link, we have also provided the ‘why’, explaining how your SOI such as your clients, friends and family members can support you as an agent.
You can find the link geared toward this audience here, if you support the bill and are looking for support from your community: https://goo.gl/qGpZYn
There are one of two outcomes for this, either Bill 104 will get passed, or it won’t. Let’s take a look both outcomes.
Bill 104: Yes
If Bill 104 passes, then agents in Ontario will be able to incorporate their businesses, obviously.
How would the process start?
There are three ways to incorporate your business, this can be done:
- Electronically with a fee of $300
- In person at a Service Ontario location with a fee of $360
- By mail with a fee of $360
You will need to download the forms required, which you can find here
Article of Incorporation, Form 1
Consent to Act as First Director, Form 2
You will also need to register your business name if your business will not be operating as a numbered name, and you will be required to get a new HST number. It’s highly recommended that you work with an account and a lawyer to structure your incorporation successfully from the beginning.
To gain more information about the tax structure for incorporations in Ontario, you can find more material here on the government website
- Basic rate Part 1 is 38% on taxable income, 28$ after federal tax abatement
- After the general tax reduction, net tax rate is 15%
- For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 10.5%
Generally, provinces and territories have two rates of income tax – a lower rate and a higher rate. Lower rate = 4.5% and higher rate = 11.5%
Agents will need to keep in mind that incorporating their business will always require more focus on bookkeeping, record keeping and filing. If you find yourself a little unorganized with record keeping, you will need to strengthen your discipline. Another aspect to keep in mind, is that once you draw money out of your corporation, the funds are still taxable. However, as real estate agents often work in a cycle, funds can remain in the account and drawn out on low income years, and defer their income, which would not be an option as an independent contractor.
In addition to a more predictable and stable income, there are three other benefits to incorporating a business, as outlined by Patterson law.ca, include:
- After-tax dollars can be transferred to a connected holding company tax-free.
- With the lower tax rates, more after-tax dollars are available to invest.
- Investments can grow and no additional tax is paid until the gain is realized or additional funds are removed from the company.
Patterson Law is a law firm who works with real estate agents in Nova Scotia, a province which currently allows for agents to incorporate their business. They have outlined questions to determine if incorporation is the right path for you, by asking these 4 questions:
- Will you require all of the profits from your business for personal or family expenses?
- Are there other individuals that you routinely support with the business, other than your employees, and do these individuals have other significant sources of income?
- Are you looking to invest your excess funds?
- Is protecting your personal assets from your business liabilities desirable?
You would benefit greatly from incorporating your business if you have answered yes to these questions. They have also provided an outline to the regulatory requirements for companies trading in Real Estate.
Bill 104: NO.
If the bill does not pass, you still have some options. According to Madan Chartered Accountant, an accounting firm located in Mississauga, Ontario, you can structure your business differently. They have posted an article on tax saving tips, which includes 4 steps to a better tax structure. These steps include:
Step 1. Create a new corporation
This new corporation should be owned by your spouse, which would perform managerial services such as marketing, administration, and other functions on behalf of you, the agent. This corporation is structured in such as way to charge a fee to you for performing managerial services.
Step 2. Determine expenses to charge
This would include expenses such as rent, staff, the internet and general overhead. An invoice would be charged back to you, with a markup of 15-25%
Step 3. Labour charges
The next step would be for the corporation to charge you for time spent by the corporation on tasks such as marketing, administration etc. on an hourly basis.
Step 4. Monthly charges.
The last step would be to pay monthly bills to the corporation by you, for the services.
Taken directly from the website, here is the example they provide:
For example, assume that the invoice totals $15,000 for the month. You (real estate agent) would receive a deduction for the $15,000 paid at a tax rate of 46.4% (marginal tax rate). Your spouse’s corporation will pay income tax on $15,000 received at a tax rate of only 16.5%. So you can see how we saved 30% of income taxes by simply using a management company structure.
Madan Chartered Accountants emphasizes the importance of having the right management agreement in place and urges agents to have a lawyer and an accountant structure this for you. They also claim this strategy would only work if you have a spouse with whom you would like to share the income. The comment sections are filled with questions from real estate agents about the legitimacy of this process. Before taking any route, we again encourage you to speak with your own accountant and lawyer to ensure you are not putting your business in jeopardy and are within the regulations. You can watch the tax saving strategies here:
Why are We Supporting Bill 104?
In addition to the tremendous tax saving benefits for real estate agents, our view at Designation Hub is simple, more value is needed. It’s not rare to find fierce competition in Ontario, especially in the GTA. There is a great amount of pressure on agents both from the competition, as well as clients. On one hand, agents need to keep up with the never-ending competition of online marketing and SEO strategies. Although advertising has become more cost effective, with the ability to reach more clients in a short period of the time, competition has also accelerated. It’s no longer about billboard or newspaper space, but the website and PPC campaigns.
On the other hand, with the increase and ease of use of technology, agents are still being challenged about their value from clients and negotiating their commission. Technology and digital marketing will be either an agent’s best friend or worst enemy, depending on how they position themselves. Our philosophy at DH has always been about value, and we encourage real estate agents to invest in their marketing skills and in themselves through training.
This is essential to combat the continuing doubt of the agent’s necessity and help gain a competitive edge in their market. With new apps and companies such as Reali, Ten-X, and Comfree, there seems to be on-going discussions about conducting real estate transactions without real estate agents. The greatest value of a real estate agent is what they know, rather than what they do. Forbes.com wrote an article on the role of agents and brokerages on ways they can add value, with a blog titled Are Real Estate Broker Obsolete? (click here for the article). The basis of this article is that it all comes down to the value provided by agents. Some may agree or disagree with the article, however, the one thing that cannot be argued, is that real estate agents have to consistently provide value.
How Are We Supporting Agents:
In addition to bringing awareness to the residents of Ontario with compelling reasons to vote YES for Bill 104, Designation Hub has also created a campaign for Real Estate Agents in Ontario only. To support our agents, we are offering 20 free designations of the agent’s choice. All training will include the full platform of the online training, tools and real estate scripts, with a free lifetime membership for agents or their assistant. The online training can be accessed from any location at any time online, allowing all licensed agents in Ontario to qualify. To enter this raffle, please sign up here:
Deadline for submission to the raffle ends April 7th and winners will be announced April 10th.
In addition, we are providing Ontario realtors with $50 off any designation between March 20th and May 1st, 2017, using the promo code bill104.