Deferring / Avoiding Income Taxes

One of the most aggressive reasons for the real estate agents to incorporate is the tax deferral/avoidance benefits. Those benefits are dramatically seen when you have a banner year, followed up by a bust year.

Let’s say in year 1, you generate $280,000 of income after your business expenses are paid. In year 2, you generate $20,000 of income after your business expenses are paid.
As a sole-proprietor, you earn all of the income you generate in the year you generate it. Earning that money in those years will also gift you an income tax bill of approximately $118,000. That means that you are paying over 39% of your income to the government in taxes over those two years. 
This is where a corporation can benefit you. With a corporation as an extra step between the brokerage and you, the corporation can delay when you earn your income. This means that in a banner year, you can leave some of your income in the corporation to be paid out when you have a bust year. 
Following our example from above …
When you generate $280,000 in year 1, you can have the corporation pay you only $150,000, and hold onto the other $130,000 for the future. By not paying you the other $130,000, you defer those taxes into the future. In year 2, when you only generate $20,000, you can add the $130,000 from the previous year giving you total income of $150,000.
In this situation, you were still paid a total of $300,000 over two years. But the total tax bill was reduced down to $98,000. By reducing your income tax bill by $20,000, this strategy becomes a tax avoidance strategy as well.
Can this apply to you? Possibly. Given how hot the real estate market has been across Ontario since May, you could be looking at a banner year. If you still have houses that you expect to close before the end of December, incorporating can allow you to defer that income into 2021 and cap the income tax that you have to pay in 2020.
If you want help deciding if it’s time to incorporate, I’m happy to help you with that decision. Book yourself in for an assessment, and we can talk through your specific situation. Schedule an appointment.
Before I get a bunch of comments regarding the corporation having to pay tax in the money that was left in – yes that is true. I glossed over that for the example.