There are many pros and cons when it comes to incorporating, and at Books In Line, we want you to be fully informed so that you can make the decision that works best for YOU. Please see below an outline of the advantages vs disadvantages to help you decide if this may be a right fit for you:
- Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% personal taxes on entire earnings.
- Tax deferral opportunities – This allows you to grow money on tax deferral basis through various investment vehicles.
- Income splitting between among spouses. Of course, be aware of TOSI rules (Tax on split income)
Disadvantages of incorporation are usually compliance related costs.
- Incorporation charges – This could range from $1,000 to $2,500.
- Higher accounting fees – You will be paying higher fees for corporate filing and the required bookkeeping, which includes bank and credit card reconciliations.
- Stricter compliance – You will be required to submit a T4 if you decide to withdraw money through payroll for yourself and/or spouse. Also, you must make payroll remittance payments on a monthly basis to stay in compliance with the CRA.
- Primarily for high income agents – No advantage if an agent needs all their earnings for personal use – that is, the advantages only exist for high income earning agents who can afford to leave some earnings in the corporation and pay a lower tax rate.
Advantages of incorporating outweigh the disadvantages despite the higher compliance and accounting cost.
Please note that by incorporating, your practice will not result in any additional deductions from your income. You can still deduct the expenses that you have been deducting as a sole proprietor. The biggest advantage of incorporating is in tax deferral, not in tax deductions.
In summary, this is a progressive step by the Ontario Government to bring fairness among all professionals. Real estate agents who are high income earners could see significant tax impact and reduction from this change.However, just because you can incorporate does not mean you should. There should be a quantitative and qualitative analysis performed before you make this decision.
For further assistance, please contact us at 905-571-2665 to book a phone consultation.