Personal Real Estate Corporations (PREC)
Are you a real estate broker or agent looking to reduce the tax burden on your commissions? Do you want to defer taxes to a later date so you can reinvest and grow your wealth? If you have funds available after covering living expenses and taxes, a Personal Real Estate Corporation (PREC) may be a valuable tax-planning tool.
Since October 1, 2020, managing brokers, associate brokers, and sales representatives have been eligible to licence a PREC in Ontario.
Tax Benefits
A Personal Real Estate Corporation provides real estate professionals with greater flexibility in income planning and tax planning.
Without a PREC, real estate agents and brokers pay tax at their personal marginal rate, which can be as high as 53.5% in Ontario. By contrast, commissions paid to a PREC may be taxed at the Ontario small business corporate tax rate of 12.2% on the first $500,000 of active business income (assuming eligibility).
This structure allows you to:
- Defer income tax to a future year
- Pay a lower tax rate on income retained in the corporation
- Invest more capital inside your corporation to grow your wealth
If you are considering licensing a PREC, it is important to understand the restrictions on the types of business activities permitted.
The Controlling Individual
Any real estate professional wishing to provide services through a PREC must be the “Controlling Individual.”
The Controlling Individual must:
- Be licensed at the same level and for the same categories of real estate services as the PREC
- Be licensed with the same brokerage as the PREC
- Own all voting shares of the corporation
- Be the sole director and officer of the corporation
A PREC may issue non-voting shares. These may be owned by:
- The Controlling Individual
- A spouse or common-law partner
- Children or step-children
- A corporation owned by the above
- A trust with the Controlling Individual, spouse, or children as beneficiaries
Restrictions
There is a common misconception that a PREC is limited strictly to real estate services. This is not accurate.
Under O. Reg 536/20 of the Real Estate and Business Brokers Act (REBBA) 2002, the only restriction is that a PREC may not engage in the business of trading in real estate.
This restriction should be clearly reflected in Section 5 of the Articles of Incorporation.
A PREC may, however:
- Conduct any other non-real estate business
- Hold and grow investments inside the corporation at any financial institution
- Carry on other permitted business activities
These activities are compliant with the regulations.
Liability and Discipline
A PREC does not limit personal liability. While a PREC may receive commissions, it is not the entity providing real estate services. Agents and brokers remain personally responsible for all services they provide.
If the PREC commits professional misconduct, both the PREC and the Controlling Individual may face disciplinary action. Any suspension, cancellation, or restriction on the PREC’s licence applies equally to the controlling individual’s licence, and vice versa.
Criteria for a PREC
A Personal Real Estate Corporation must meet the following requirements:
- Incorporated under the Ontario Business Corporations Act (OBCA)
- One single controlling shareholder (broker or salesperson) who owns all voting equity shares
- The controlling shareholder must be the president, sole director, and sole officer
- The controlling shareholder must be registered as a broker or salesperson
- Non-voting shares (if any) may be owned by family members or related entities
- No agreement may restrict or transfer the management powers of the sole director
PREC Licensing Conditions
To be licensed by the Real Estate Council of Ontario (RECO), the PREC must meet these conditions:
- The PREC does not engage in the business of trading in real estate
- The controlling shareholder is employed by a brokerage to trade in real estate
- The PREC and its shareholders cannot represent that the PREC trades in real estate
- The PREC cannot operate as a brokerage
- All remuneration for real estate activities must flow through the brokerage → PREC → controlling individual
- The PREC must not hold client funds or property on behalf of a brokerage
Once licensed, any changes to your individual licence must be updated simultaneously for both the PREC and the controlling individual. Both licences expire and must be renewed together.
Agreement with Brokerage
To qualify as a PREC, there must be a written agreement between:
- The PREC
- The Controlling Shareholder
- The Brokerage
This agreement governs how the corporation and the Controlling Individual operate in relation to the brokerage.
Final Step: Provide Information to RECO
Once the PREC has been incorporated, certain information must be provided to RECO by emailing: [email protected]
Incorporating a PREC
Before incorporating a PREC, it is strongly recommended to seek professional legal advice to ensure this structure is appropriate for your tax situation, professional goals, and compliance requirements.
The corporate lawyers at Kalfa Law Firm can assist you with:
- Structuring and incorporating your PREC
- Navigating RECO compliance and documentation
- Understanding tax implications and limitations
To learn more about corporate structures, see our related services:
Advantages of a PREC
- Access to corporate tax planning
- Significantly lower tax rates on retained earnings
Disadvantages of a PREC
- Personal liability is not limited
- Additional regulatory requirements
- Costs: approximately $1,500 to establish and about $500/year to maintain (plus accounting fees)
Speak to a Corporate Lawyer Today
A Personal Real Estate Corporation can offer significant tax and planning advantages, but only if incorporated and structured correctly. Kalfa Law Firm is here to guide you through the process.
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