In Ontario, real estate agents and realtors have traditionally operated as sole proprietors, as they were not allowed to incorporate their businesses. However, Bill 145, the Trust in Real Estate Services Act, 2020, introduced important changes, giving real estate professionals the option to establish a Personal Real Estate Corporation (PREC).
This change offers several financial and tax planning benefits, including the ability to defer taxes by retaining income within the corporation. In the following discussion, we will explore the process of setting up a PREC, its tax advantages, and key considerations for real estate professionals.
Disclaimer: As always, this article is for general purposes. It is not a tax or a legal advice. The readers must consult their corporate tax accountant to get tax advice tailored to their specific circumstances. The article may not be updated for any future changes.
What is a PREC?
A Personal Real Estate Corporation (PREC) is a business structure that allows real estate agents and brokers in Ontario to incorporate their businesses. This provides access to the financial and tax benefits typically available to incorporated companies, giving real estate professionals greater control over their earnings and tax planning.
A PREC operates similarly to professional corporations used by lawyers, doctors, and accountants, enabling realtors to manage their income more efficiently while complying with industry regulations.
Benefits of a PREC
Setting up a PREC offers several advantages for real estate agents, some of which are debatable:
Tax Deferral Opportunities
Tax deferral is a key advantage of incorporating any business in Canada.
A Personal Real Estate Corporation (PREC) allows real estate agents to retain earnings within the corporation, postponing personal taxes until funds are withdrawn. This enables agents to take advantage of lower corporate tax rates (12.2% to 26.5%) instead of the highest personal tax rate of 53.5%. By deferring income, professionals can strategically manage their tax liabilities and reinvest profits for business growth.
Lower Corporate Tax Rates
Many would incorporate their businesses assuming that they will have lower taxes. As mentioned before this is a deferral and must not be confused as a tax saving.
Simply put, Instead of paying personal income tax rates as high as 53.5%, real estate agents can benefit from corporate tax rates ranging from 12.2% to 26.5%, depending on their income levels.
Income Splitting Opportunities
A Personal Real Estate Corporation (PREC) may provide real estate professionals with opportunities for income splitting.
By distributing income to family members in lower tax brackets, agents can reduce their overall tax burden. However, income splitting must comply with Tax on Split Income (TOSI) rules, which limit the ability to shift income to family members unless they contribute meaningful work or investment to the business.
Proper tax planning is essential to ensure compliance and maximize tax savings (or optimizations).
Business Expense Deductions
A Personal Real Estate Corporation (PREC) allows real estate agents to deduct eligible business expenses, helping to reduce taxable income and optimize their overall tax position. Common deductible expenses include marketing costs, office rent, professional fees, insurance, licensing fees, and business-related travel.
However, having a PREC does not mean that more expenses become deductible automatically as opposed to the real estate agents who are self-employed. All deductions must meet the business purpose test, meaning they must be reasonable, necessary, and directly related to earning business income. The Canada Revenue Agency (CRA) closely reviews business expense claims, so proper documentation and compliance with tax rules are essential.
Is PREC Right for You?
Incorporating as a Personal Real Estate Corporation (PREC) offers tax advantages and financial flexibility, but it may not be the right choice for everyone.
Real estate agents should evaluate key factors such as income levels, cash flow needs, business expenses, and long-term financial goals before deciding.
A PREC is most beneficial for agents who earn more income than they need for personal expenses, allowing them to defer taxes and reinvest earnings within the corporation. However, incorporation also comes with administrative costs, compliance requirements, and regulatory considerations.
You must understand
- the difference between income taxes for self-employment and corporate taxes.
- that the tax deferral may not be the best tax planning option available to you. Continuously deferring the earnings inside a corporation to avoid personal taxes may make you pay more income taxes in the long run.
- the taxation of passive income (investment income) and capital gains inside a corporation has specific rules and certain complexities.
- the corporate income tax returns are more expensive than the self-employed individual tax returns, along with other administrative costs and burdens.
- that you will not get any additional special income tax deductions that are not available to you as a self-employed individual.
- that you may have to create a section 85(1) rollover when incorporating a PREC.
Consulting with a tax professional or accountant is essential to determine whether a PREC aligns with your financial and business strategy.
Some other common Questions and Issues around PREC
Can Realtors use PREC for Passive Investments?
A Personal Real Estate Corporation (PREC) can invest in passive assets, such as stocks, bonds, mutual funds, or real estate properties, to generate additional income.
There are no restrictions on passive investments within a PREC, allowing realtors to diversify their income sources. One of the touted reasons for setting up a PREC is to reinvest the earings.
However, passive investment income earned inside a corporation is taxed at a higher rate than active business income. The corporate tax rate on passive income can be as high as 50%, though a portion may be refundable when dividends are paid to shareholders. Given the tax implications, real estate professionals should consult a tax accountant to develop a strategy that aligns with their financial goals and minimizes tax liabilities.
What are the Insurance Nuances of Using a PREC?
A PREC is a separate entity under the laws of Ontario. Therefore, anyone can sue the PREC, and it comes with additional insurance implications. Realtors can approach their insurance brokers for available policies to cover their PRECs. The personal insurance coverage of the real estate agent does not apply to the PREC.
How to Choose a Name for Your PREC?
When selecting a name for your Personal Real Estate Corporation (PREC), the regulations vary slightly by province.
For example,
In Ontario, there are no specific restrictions on the name of a PREC, but it must follow general corporate naming regulations under the Business Corporations Act. The name should not imply that the corporation is directly involved in real estate trading. The PREC’s name should clearly distinguish it as a corporation while maintaining compliance with the Real Estate Council of Ontario (RECO) rules.
The name should not suggest that the PREC itself is conducting real estate transactions. For example, it cannot use terms like “Real Estate Brokerage” or “Trading” in its name. Realtors often choose to incorporate their legal name as part of the PREC name, such as “Maja Curic Professional Real Estate Corporation.”
In British Columbia, the naming rules for a PREC are also similar to those of Ontario, with a few additional considerations under the Business Corporations Act and the Real Estate Council of British Columbia (RECBC). The name must not suggest that the corporation itself is engaged in real estate trading.
In Alberta, the naming process for a PREC follows the Business Corporations Act and is subject to regulations from the Real Estate Council of Alberta (RECA). Similar to other provinces, Alberta allows realtors to use their personal name in the corporation’s title, but the name cannot mislead clients into thinking the corporation itself is trading real estat
How are a PREC and Registrant Related in Regard to Registering via RECO?
A Personal Real Estate Corporation (PREC) can only receive income from real estate transactions when its controlling shareholder is a registrant with the Real Estate Council of Ontario (RECO). The registrant is the licensed real estate professional who meets RECO’s requirements for trading in real estate.
It is important to note that the PREC itself does not need to be registered with RECO under the Trust and Real Estate Services Act (TRESA). Instead, the registrant who controls the PREC must notify RECO if they are conducting real estate business through the corporation. This notification ensures that RECO is aware of the registrant’s use of a PREC for their real estate activities.
In summary, while the PREC benefits from the corporate structure for tax and liability purposes, it is the registrant who must maintain their individual RECO registration and comply with real estate trading regulations.
Do Realtors Have to Include Restrictions of TRESA or RECO in the PREC’s Articles of Incorporation?
There are no mandatory requirements to include the restrictions from TRESA (Trust and Real Estate Services Act) or RECO (Real Estate Council of Ontario) in the Articles of Incorporation for a Personal Real Estate Corporation (PREC). However, some realtors may choose to include these restrictions voluntarily to maintain transparency and clearly define the scope of the corporation’s activities. Doing so may help prevent inadvertent changes that could disqualify the PREC from engaging in real estate activities.
That said, including these restrictions in the Articles of Incorporation might have certain disadvantages or unnecessary limitations. As the business evolves, incorporating such restrictions could make future changes more difficult.
You can discuss this with your income tax accountant. However, if you are planning to introduce such restrictions, it’s advisable to consult with a lawyer to determine the best course of action based on your unique business situation and future plans. Legal counsel can help ensure that the structure and terms of the PREC align with both RECO regulations and your long-term business goals.
Do You Need to Transfer the License of Your PREC if You are Changing Brokerage?
If you are a registrant operating through a Personal Real Estate Corporation (PREC) and you decide to change brokerages, you do not need to transfer the PREC’s license. The PREC itself does not hold a real estate license under RECO (Real Estate Council of Ontario); instead, it is the registrant (the real estate professional) who holds the license to trade in real estate.
However, if you change brokerages, you will need to notify RECO about your new brokerage affiliation. You will also need to update your brokerage relationship under RECO’s regulations. While the PREC remains the same entity, the registrant should ensure that the proper steps are taken to re-register or update their information with RECO as part of the brokerage change process.
Who can Qualify as a Non-Equity Shareholder in a PREC?
In a Personal Real Estate Corporation (PREC), family members of the agent or broker can qualify as non-equity shareholders. These family members may include:
- Parents: Defined as individuals who have shown a settled intention to treat the agent as family. This can include biological parents or others who have established a familial relationship with the realtor. However, children living in foster homes under the lawful custody of someone else may not qualify as non-equity shareholders.
- Spouse: Defined as the person the agent is legally married to or someone they are living within a conjugal relationship outside of marriage.
- Children: A child of the realtor, defined as someone the agent has shown a settled intention to treat as a child within their family. Again, children living in a foster home or under the lawful custody of others may not qualify as non-equity shareholders.
It’s important to note that non-equity shareholders do not have voting rights or ownership interests in the corporation but can receive income through dividends or other distributions. Always consult a tax professional or lawyer to ensure that any family members added as non-equity shareholders meet the eligibility requirements and are in compliance with the relevant rules and regulations.
Can You Use Your Team Name for Your PREC if You are a Member of a Team?
There are no limitations on naming a PREC with your team name if you are a member. However, the name should comply with all the naming regulations applicable to an incorporated business in Ontario.
Additionally, the name must be unique and not be the same as the name of another corporation. Therefore, other team members will not be able to use the same team name for another PREC.
As a result, the agent will have to choose a different name or change it to make the name unique.
Can a Team of Realtors Incorporate a PREC?
A Personal Real Estate Corporation (PREC) must be incorporated by an individual realtor. According to Ontario law, a group of agents or brokers cannot jointly form a PREC. Each PREC must be under the control of a single realtor.
As a result, each realtor on the team must establish their own separate PREC. While realtors can collaborate, share resources, and work together as a team, they cannot trade under the name of their respective PRECs as a group. Each realtor must operate their PREC independently, even if they are working together in a team setting.
This structure ensures that each PREC remains compliant with the regulatory framework and that only individual realtors are responsible for managing and controlling their own corporation.
What are the Fees for Registering a PREC and Incorporation?
Realtors are not required to register their Personal Real Estate Corporation (PREC) with RECO, as the registration requirement applies only to the individual registrant. However, realtors must pay the fees associated with incorporating a business in Ontario. The incorporation fee typically costs around $300.
In addition to the incorporation fees, realtors may also incur costs for professional services such as accounting and legal consultations. These services are often necessary to ensure the PREC is set up correctly and is compliant with applicable regulations.
Moreover, PRECs must file an annual corporate return to maintain their active status with the government. This filing will come with additional filing fees, which vary depending on the type of return required.
In summary, realtors will need to account for the initial incorporation fees, annual filing fees, and any professional service costs (such as those for accountants or lawyers) when setting up and maintaining a PREC.
Can You Defer Income Tax Payments through Your PREC for Paying in a Low-Income Year?
A Personal Real Estate Corporation (PREC) has the potential to defer income tax payments by holding or deferring its income or revenue from a given financial year. However, whether this results in a material tax deferral depends on several factors, including the shareholders, the registrant controlling the PREC, and the specific circumstances of the PREC.
Because tax deferral opportunities can be influenced by individual financial situations and corporate structure, it is critical to seek professional advice from a professional corporate tax accountant to fully understand how to optimize tax deferral strategies. They can help assess whether deferring income tax payments in a low-income year is advantageous for your specific situation.
How Can We Help?
PRECs allow real estate agents and brokers to incorporate their business.
We provide corporate income tax services in the provinces of Ontario, Alberta and British Columbia. If you are planning to incorporate a PREC, or looking for corporate tax preparation or planning for an exciting PREC, we are here to help you.
