Real Estate Incorporation – It’s for all Real Estate Agents – but it’s not…

Should a realtor incorporate? In this blog post, we will explore the everyday practical considerations of incorporation. This includes legal responsibilities, record keeping, and what to look for in a good practitioner.

To catch up, read Part 1 of our blog series on realtor incorporation.

Legal

Incorporation results in a separate legal entity. This comes with obligations such as:

  • Maintaining Articles of Incorporation
  • Preparing Annual Resolutions
  • Documenting Minutes of Meetings

For example, if the company wishes to issue a dividend, it must be supported by a director’s resolution that must be maintained with the company records.

These resolutions are often overlooked by individuals that incorporate themselves online and results in non-compliance with the Ontario Business Corporations Act.

Using a reputable lawyer will help ensure that all of the legal requirements are met.

Accounting and Record-Keeping

One of the most important aspects of maintaining your Personal Real Estate Corporation [PREC] is the accounting behind it. Unlike a sole proprietorship, a corporation is required to maintain a set of financial statements including a balance sheet and income statement.

This means you will need to account for every dollar going in and out of your bank account. Without having a proper system in place this can be challenging.

Bookkeeping

There are many ways to handle bookkeeping, but in this article, we will explore two methods. One for the company looking to keep costs low, and one for the growing or mature company.

 

Excel Sheet

Who is it applicable for:

The company in the start-up phase keeping costs at a minimum or a business with few transactions that are often predictable.

Pros:

  • Free, just requires a worksheet
  • Easy to use, users need to keep track of revenue and costs going through their bank accounts and assign them to a category. Most reputable firms will have a free template they provide their clients.

Cons:

  • Time-consuming – entering the data and manually allocating can be time-consuming as transactions increase.
  • Formula errors – it is possible formula errors could occur leading to incorrect information.
  • HST – if the company is registered, HST has to be extracted from relevant items which can be time-consuming, and where different rates are required, HST can be difficult to complete efficiently.
  • Automation – it’s difficult to scale a business with an excel sheet and even more difficult to automate the accounting function.
QuickBooks Online or similar package

Who is it applicable for:

The company that is growing, and for the owner that needs to view results, and wants to automate away functions to get more time in their day.

Pros:

  • Prevalence – Widely used in North America, so easy to find support.
  • Automation – Setting up a rules-based system will help significantly reduce the amount of work involved.
  • Third-Party Integration – The ability to connect third-party payment and receipting applications will provide the ability to monitor your results in real-time and operate in a paperless environment.
  • HST calculations – individual transactions are marked with an HST code so HST reports can be run at the relevant period end to produce accurate results.

Cons:

  • Costs ~$35/month.
  • The average person will require accounting support.

Corporate Taxation

T2 return & Notice to Reader Financial Statements

PRECs will be required to file T2 returns. You can choose a year-end for your corporation once incorporated.  It must not be longer than 371 days from the date of incorporation, so thought should be given to your year-end before you incorporate.

It is a good idea to have a set of Notice to Financial Statements prepared. These are prepared by a Chartered Professional Accountant firm and will be useful should you ever need to provide financial information about your company. In some cases, your bank or other relevant parties may request such statements.  

T4 – Statement of Remuneration

All remuneration including salaries, wages and taxable benefits paid by a PREC to employee(s) will need to be reported on a T4. These are due to be issued by the last day of February each year. A filing with the CRA is also required.

Payroll remittances

As an employer, you are required to pay payroll remittances to the CRA for income taxes, CPP and EI where applicable.  For most employers, this is due the 15th of the subsequent month of payment.

Many small businesses miss deadlines associated with payroll remittances.  This is a costly endeavor as failure to file penalties are steep. Interest and filing penalties paid to the CRA are also not deductible for tax purposes, so ensuring you have an accountant that can file these returns, or send you reminders to file them will save your business in unnecessary fees.

T5 – Statement of Investment Income

PRECs that pay out dividends to the shareholder or interest on some loans will need to be reported on a T5 form. These are due to be issued by the last day of February each year. A filing with the CRA is also required.

Shareholder Loan Account

This account tracks the amount of money borrowed or loaned to the company from the shareholder.  The tax implications of borrowing from a corporation are commonly misunderstood.  Borrowing money from a corporation, in most cases, result in a taxable benefit to the shareholder. If left outstanding for more than the allowable period, the full amount of the loan will be taxable in the hands of the shareholder.

Ensuring that the shareholder remains onside with shareholder loans is extremely important, as failure to abide by the Shareholder loan rules outlined in Section 15 of the Income Tax Act can be costly to the owner.

HST

It is likely that your PREC will be required to register for HST. In general, businesses with over $30k in revenue are required to register for HST. Depending on your situation, you may file monthly, quarterly or annually. Ensuring that you are calculating HST and claiming HST correctly is not only required by law but also will help ensure you don’t overpay the HST.

Many small businesses miss deadlines associated with HST filings. This is a costly endeavor as failure to file penalties are steep. Interest and filing penalties paid to the CRA are also not deductible for tax purposes, so ensuring you have an accountant that can file these returns, or send you reminders to file them will save your business in unnecessary fees.

What to look for in a tax professional:

  • Location
    • Working with a competent local professional that understands Corporate taxation and has graduated from CPA Canada’s In-Depth Course is essential to getting your corporation set up right and mitigating risk.
  • Firm Profile
    • Is the firm you choose the right size? Using a boutique firm that has a specialty in small business means you will get more personalized service. Boutique firms tend to focus on client service meaning you will deal with an assigned representative that will have longevity on your file work and thoroughly understand your business.
    • Ensure the firm values your time. Having a responsive practitioner allows you to able to be proactive with your business.
    • Does the firm understand your industry?  Using a one-sized fits all approach is usually not in the best interests of small businesses.
    • Highly Ethical – this speaks for itself.  
  • Technology
    • Is the firm able to offer the latest in technological solutions?
    • Does the firm use a mobile software to communicate? 
    • Can the firm provide a fully digital experience?

A small plug – At Robert Ng, CPA Professional Corporation, we are dedicated to staying up to date with the latest offerings and have partnered with several of the industry leaders such as QuickBooks Online, Receipt Bank, Plooto and HubDoc to ensure our clients receive the best possible service. Although we have a fax line, we’ve never used it.

Making sure your accountant is staying up to date with software and technologies helps ensure your business is efficient and you aren’t spending time on non value added tasks.

  • Value
    • Understanding the true value of your advisor is important. Having an ethical advisor that has the ability & tools to ensure that you never miss a deadline is extremely important.  Ensure your professional is in good standing with the relevant professional body.
Links to Professional directories:

Ontario Law Society

https://lso.ca/public-resources/finding-a-lawyer-or-paralegal/lawyer-and-paralegal-directory

CPA Ontario Directory:

https://myportal.cpaontario.ca/s/member-directory

Google Reviews

Using Google Reviews is also a good option for determining whether a firm has a good reputation.

About Us:

Robert Ng, CPA Professional Corporation is a local CPA firm based in London, Ontario.

 

We specialize in providing small businesses and professionals top tier Corporate Tax advice.  Through our partnerships with London, ON-based law firms, our Real Estate clients get a one-stop-shop.

 

Contact us to learn more about how we can help a realtor incorporate!