On October 1 2020, the government of Ontario passed the O/Reg 536/20: Personal Real Estate Corporations, under the Real Estate and Business Brokers Act, 2002, allowing real estate salespeople and brokers to incorporate their business by registering a Personal Real Estate Corporation (PREC). Incorporation allows real estate professionals to earn their business income through a corporation and enjoy some tax advantages and income planning benefits.

Benefits

Tax Advantages

Income earned in a PREC is taxed at the corporate tax rate, which is substantially lower than the personal tax rate. As a real estate salesperson or broker in Ontario without a corporation, you pay taxes on the commissions that you earn at your personal rate, the highest personal tax rate is 53.52% on income over $220,000. On the other hand, the corporate tax rate of 12.5% applies to the first $500,000 of active business income and 26.5% on income above that threshold. Obviously, the corporate tax rate of 12.5% is substantially lower than the top marginal personal tax rate of 53.52%.

For example, if a real estate professional without a corporation earns $500,000 in a year, the professional would have approximately $266,344 of after tax income left that could be invested. On the other hand, if the same real estate professional makes  use of a PREC, the same $500,000 income would result in approximately $437,500 of available funds for investment within the corporation.

In essence, when income is retained in a PREC and taxed at the corporate rate, it leaves real estate professionals with more funds to invest within the personal real estate corporation and personal tax can be deferred until the amount is paid as a dividend in the future. Withdrawing the after-tax income may also be deferred to a tax year in which there is an expectation of a lower marginal tax rate such as retirement where there may be anticipation of a drop in income, resulting in a lower marginal tax rate.

Income Splitting

Real estate professionals may achieve income splitting with a personal real estate corporation by including family members as shareholders. Income splitting allows income to be transferred from an individual who pays tax at a high tax rate to a family member who pays tax at a lower tax rate, thereby reducing the overall tax paid by the family. 

Note that based on the 2017 amendments to the Income Tax Act which introduced the tax on split income (“TOSI”) rules, the ability of professionals to use professional corporations to split their income with low earning family members has been significantly curtailed. The TOSI rules require that for corporate dividends to be taxed in the hands of a lower earning family member, that family member must be adequately involved in the professional’s business. For example, the family member should work in the business for at least an average of twenty hours per week or the family member must be at least 65 years old.

Are There Restrictions on the Activities of A PREC?

A PREC is not allowed to trade in real estate other than to provide the services of its Controlling Shareholder to the brokerage. 

Additionally, for shareholding in a PREC must be held directly or indirectly by the “Controlling Shareholder”. The Controlling Shareholder must be the real estate salesperson or broker registered with the Real Estate Council of Ontario(RECO), and must be the sole director and officer of the personal real estate corporation. Family members may only own non-voting and non-equity shares. A Family member may be a spouse, child, parent, or a trust for a minor child. The PREC’s non-voting shares may also be owned by a corporation, whose shares are owned by the real estate professional, their spouse or their child.

Does a PREC Protect Me From Personal Liabilities?

A PREC does not protect real estate professionals from personal liability. The PREC and the Controlling Individual may be disciplined if the corporation commits professional misconduct.

PREC Licensing Conditions

To be licensed by RECO, registrants of personal real estate corporation should ensure that:

• The PREC does not carry on the business of trading in real estate other than providing the services of its Controlling Shareholder to the brokerage that employs that individual
• The Controlling Shareholder is employed by a brokerage to trade in real estate
• The PREC, its Controlling Shareholder and others are prohibited from representing to the public that the PREC trades in real estate
• The PREC does not carry on business as a brokerage
• The PREC does not, on behalf of the brokerage, directly or indirectly hold any money or other property of a person in connection with trading in real estate

Enter A Tri-Party Agreement

There must be a Tri-Party written agreement between the PREC, the Controlling Shareholder and the brokerage house, outlining the relationship of the brokerage and the corporation and the Controlling Shareholder.

Under the agreement, the PREC agrees:

• Not to hinder or obstruct the brokerage or its broker of record in their performance of duties under the legislation
• Not to hinder or obstruct the Controlling Shareholder in the performance of the Controlling Shareholder’s duties under the legislation
• To provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of record to comply with their duties under the legislation and to enable the brokerage and its broker of record to ensure that the Controlling Shareholder is complying with the Controlling Shareholder’s duties under the legislation

Brokerage Obligations:

• Before any remuneration is paid to the PREC, the brokerage must satisfy itself that the corporation meets the requirements to be a PREC
• The registrant must enter into an agreement with the PREC and the brokerage regarding the use of the PREC and payment of remuneration to the PREC

Controlling Shareholder’s Obligation:

• The registrant must be employed by the brokerage
• In establishing the PREC, the registrant must ensure that the criteria and conditions identified are met
• The registrant must enter into an agreement with the PREC and the brokerage regarding the use of the PREC and payment of remuneration to the PREC

• The registrant must notify the registrar at RECO of the legal name of PREC and the address for service before the PREC receives any remuneration from a brokerage
• The PREC cannot pay the registrant an amount for remuneration that is greater than the amount of the remuneration received from the brokerage

Inform RECO About your PREC

Inform RECO about your PREC as soon as it is set up, by sending an email to  PREC@reco.on.ca. In your email, provide the name of the Controlling Shareholder, the legal name and address of the PREC.

Conclusion

A Personal Real Estate Corporation may be right for you if you are a real estate salesperson or broker; you are  interested in paying less taxes on your commissions; you want to defer paying taxes to a later date so that you can invest your money to achieve greater returns; your annual income sufficiently meets your annual expenses leaving you with extra funds to reinvest.

If you would like assistance with incorporating your PREC, contact the business lawyers at Rabideau Law today to guide you through the process. 

Related Blogs

5 Steps To Planning Your Business

Personal Real Estate Corporations Part One: What Is A Prec?

Personal Real Estate Corporations Part Two: Implications and Tax Incentives

The blog published by Rabideau Law is intended as general information only and does not serve as legal advice. By viewing the blog posts, the reader understands there is no solicitor-client relationship established. Readers are urged to consult the business and corporate lawyers at Rabideau Law on business related concerns.