Personal Real Estate Corporations (PRECs)

Build Your Wealth Faster by Protecting it from the Taxman

Until recently, a real estate agent or broker in Ontario was not permitted to incorporate, nor take advantage of the significant tax savings available to other professionals, such as doctors, dentists, and lawyers. However, for the first time in history, managing brokers, associate brokers, and representatives are now all eligible to license a personal real estate corporation.

Advantages of Forming a PREC

A PREC offers tremendous tax and business advantages, including:

  1. A Lower Tax Rate. Without a PREC, agents and brokers pay tax on their commissions at their personal income tax rate, which can be as high as 53.5% for income earned in excess of $220,000. With a PREC, however, commission will be taxed at the corporate rate of 12.2% on the first $500,000 and 26.5% on earnings above $500,000. This will leave you with a greater amount of after-tax dollars to invest in the corporation or build an investment portfolio. The lower tax rate also allows you to build a retirement portfolio more rapidly if retirement is on the horizon.

  2. Tax Deferral. Since a real estate salesperson only pays personal income tax on business income that is drawn out of the corporation as a salary, the salesperson can defer paying income taxes at a higher marginal rate by leaving a portion of her business income in the PREC. For example, say you earned $200,000 last year, but your income this year was $90,000 for whatever reason.  You can draw a salary from your retained earnings of $110,000 last year at a low marginal tax rate this year. In this example, the tax rate on the shifted dividend drops from 47.74% to 25.16%. Tax deferral is a powerful strategy for building cash reserves for lower income years, leave of absences, or retirement.

  3. Lifetime Capital Gains Exemption. If the salesperson owns a business with tangible value, the owner can sell those shares with a significant tax break. With a PREC, realtors have access to a lifetime capital gains exemption which allows them to shelter over $ 883,384 from capital gains tax on the disposition of the corporation’s shares. No such deduction is available on the sale of an unincorporated business. This tax protection is also available to your estate on the disposition of the corporation’s shares at death.

  4. Income Splitting. Subject to certain strict rules, a salesperson can split income with lower-earning family members who are actively engaged in the business and are non-voting shareholders of the PREC. The rules surrounding income splitting are complex and one should seek a tax advisor before implementing this strategy.

  5. Flexibility of Remuneration. With a PREC, a realtor can have access to a variety of payment options, such as salary, bonuses, and dividends. Your lawyer and tax advisor can assist with balancing your tax efficiency while achieving your other goals.

  6. Flexibility of Businesses.  A PREC can participate in other business enterprises other than trading real estate, such as property management, mortgage broker activities, real estate investing, and non-real estate related businesses. This allows the realtor to pool funds in the PREC, removing the need to incorporate a separate business and the need for duplication of expenses.

  7. Protection from Personal Liability for Commercial Activity. Forming a PREC will protect your personal assets from a number of expenses and claims, including your lease of office space, employees you hire, expenses that your business incurs, and business loans. Note, however, that a PREC does not shield a realtor from professional liability. The realtor is still personally liable for professional misconduct.

Are There Any Disadvantages to Forming a PREC?

If you are just starting out in the field, or do not have an income that very much exceeds your annual expenses, incorporating a PREC may not yet be worth it. At the outset, there will be legal and accounting costs for initial planning and to establish the PREC.

In addition, because the PREC is a separate legal entity from its owner, it will require annual accounting costs to prepare financial statements and tax returns. Moreover, there will also be a modest annual legal cost to prepare annual shareholder minutes and resolutions. These costs are tax deductible, but will play a role in your decision to incorporate, especially if you are earning less then $30,000 per year.  For most salespersons, however, choosing to incorporate is usually a no-brainer given the massive tax savings.

Why You Need a Lawyer

Given the novelty of the PREC, regulations surrounding PRECS have specific requirements that are difficult to meet without the assistance of a lawyer. They include:

  • A single controlling individual must own all of the voting shares, and be the sole director, president, and officer of the PREC. Note, however, that a PREC may have non-voting shares, which may be owned either by the controlling individual or an affiliation person, such as a spouse, common-law partner or child (including step-child);
  • The controlling individual must be a registered real estate broker or agent;
  • The controlling individual must be licensed to the same brokerage as the PREC for the same categories of real estate services;
  • The controlling individual can only receive earnings for trading in real estate from the PREC or their employing brokerage;
  • The PREC can only receive earnings from trading real estate from the brokerage employing the controlling individual;
  • The PREC itself cannot buy or sell real estate;
  • The PREC cannot carry on business as a brokerage;
  • The PREC cannot be advertised or communicated to the public as trading real estate or realtor services;
  • The PREC cannot, on behalf of the brokerage, hold any money or other property of a person in connection with trading in real estate;
  • Once the PREC is licensed, any future changes to a realtor’s individual license must be done together with the PREC license. The realtor’s license and the PREC’s license will expire on the same date and the realtor must apply for license renewal for both licenses at the same time.

In addition to complying with the requirements above, a realtor must enter into an agreement with the brokerage that governs the relationship between the brokerage and the corporation and its controlling shareholder. Once the PREC is formed, various documents must be sent to RECO to authorize the PREC.

It is crucial that you consult a business lawyer experienced in PRECs to ensure every step is completed correctly. 

Our lawyers understand the PREC formation process and can evaluate your unique situation to determine if a PREC is the right fit for you.

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Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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