Kalfa Law Firm | Personal Real Estate Corporation

Personal Real Estate Corporation (PREC)

Are you a real estate broker or agent interested in paying less tax on your commissions? Perhaps you want to defer paying taxes to a later date so that you can invest your money to achieve a greater return? A personal real estate corporation (PREC) may be worth considering if you have funds to reinvest after paying your living expenses and taxes. Since October 1, 2020, managing brokers, associate brokers, and representatives are all eligible to license a personal real estate corporation.

Tax Benefits:

A personal real estate corporation offers real estate professionals the ability to take advantage of the flexibility in income planning and tax planning offered by incorporating.

A PREC allows you to both defer paying income tax to a later date and pay less tax on your commissions. Without a PREC, agents and brokers pay tax at their personal rate on the commissions they earn, which can be as high as 53.5% at the top marginal rate. If paid to the PREC instead, the commission will be taxed at the corporate rate of 12.2% on the first $500,000, assuming the PREC is eligible for the small business rate. This leaves you with more money to invest within the corporation. Money you later take out of the PREC at a later date will be subject to personal income tax, but there may be additional strategies to lower your income tax rate through payment of a salary or dividends.

If you are considering licensing a PREC, you should also be aware of the restrictions around what kinds of business your PREC is allowed to conduct.

The Controlling Individual

A real estate professional who wishes to provide real estate services through a personal real estate corporation must be the person who controls the Personal Real Estate Corporation—known as the “Controlling Individual.”

The Controlling Individual must be:

licensed at the same level and for the same categories of real estate services as the personal real estate corporation
licensed to the same brokerage as the personal real estate corporation
the owner of all the voting shares of the personal real estate corporation
the only director and officer of the personal real estate corporation

However, a personal real estate corporation 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 PREC’s non-voting shares may also be owned by a corporation, whose shares are owned by you, your spouse or your child; or a trust in which the beneficiaries are yourself, your spouse or your child.

Restrictions

The activities and services provided through your PREC are not restricted to the provision of real estate services only. This is a misnomer. The single restriction under O.Reg 536/20 to the Real Estate and Business Brokers Act (REBBA) 2002, is that the corporation may not engage in the ‘business of trading in real estate’. This provision should be reflected in Section 5 of the Articles of Incorporation. The PREC may engage in any other activity or service including any other non-real estate business. As well, you are permitted to invest your funds inside your PREC within a portfolio at any financial institution and invest your funds. These activities are permitted under the regulations.

Liability and Discipline

It should be noted that a PREC does not provide protection from personal liability. While the PREC may receive commissions earned by the agent or broker, it is not a vehicle through which he or she provides services. Brokers and agents are liable for the services provided and must meet all obligations and responsibilities to clients.

If the personal real estate corporation commits professional misconduct, the Controlling Individual as well as the PREC may be disciplined. Suspensions, cancellations, or restrictions on the licence issued to the personal real estate corporation will apply to the licence of the controlling individual, and vice versa.

Criteria for PREC

The PREC must meet the following criteria:

Must be incorporated under the Ontario Business Corporations Act
The corporation has one single controlling shareholder (a broker or salesperson who owns ALL the equity shares, which are the voting shares)
The controlling shareholder is the president and sole director and officer of the corporation
The controlling shareholder is registered as a broker or salesperson
Any non-equity shares (non-voting) must be owned directly or indirectly by the family members (spouse, children, parents, trust for minor child) of the controlling shareholder or by the controlling shareholder
There is no written agreement or other arrangement that restricts or transfers the powers of the sole director and officer to manage or supervise the management of the business and affairs of the corporation

PREC conditions

The PREC also has the following conditions in order to be licensed by RECO:

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 only receives remuneration for trading in real estate from the brokerage employing the controlling individual and the controlling individual only receives remuneration for trading in real estate from the PREC or their employing 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
Once the personal real estate corporation has been licensed, any future changes to your individual licence must be done in conjunction with the personal real estate corporation. Your licence and the personal real estate corporation’s licence will expire on the same date and you must apply for licence renewal for both licences at the same time.

Agreement with Brokerage

Next, and most importantly, in order to qualify as a PREC, there must be a written agreement between the PREC, the controlling shareholder and the brokerage governing the relationship between the brokerage and the corporation and its 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
To provide whatever assistance may be reasonably necessary to enable the brokerage to determine whether the conditions are met

Final step – provision of information to RECO

Finally, once the PREC has been established, it is integral that certain information is provided to RECO by emailing [email protected].

Incorporating a PREC

It is strongly recommended that before you take steps to incorporate and licence a personal real estate corporation, you obtain professional legal advice to make sure that a personal real estate corporation is the right choice for you as well as ensure that you are setting up the PREC properly and in accordance with the regulations. The corporate and tax lawyers at Kalfa Law Firm are ready to assist you if you wish to discuss the applicability, benefits, and limitations of a personal real estate corporation.

FAQ’s:

What is a personal real estate corporation?

A personal real estate corporation is a type of corporation wherein real estate brokers and agents can provide their services, in order to avail themselves of the advantages of that corporations have such as tax planning.

What are the tax advantages of a personal real estate corporation?

Having a personal real estate corporation allows you to defer paying income tax to a later date and pay less tax on your commissions. Without a PREC, agents and brokers pay tax at their personal rate on the commissions they earn, which can be as high as 53.5% at the top marginal rate. If paid to the PREC instead, the commission will be taxed at the corporate rate of 12.2% on the first $500,000, assuming the PREC is eligible for the small business rate.

What are the restrictions placed on a personal real estate corporation?

The PREC is not restricted to the provision of real estate services only despite RECO’s initial intention. At the time when the regulations were enacted into the law, they have removed this prohibition allowing the PREC to engage in any business activity. The single restriction under O.Reg 536/20 to the Real Estate and Business Brokers Act (REBBA) 2002, is that the corporation may not engage in the ‘business of trading in real estate’. This provision should be reflected in Section 5 of the Articles of Incorporation. The PREC may engage in any other activity or service including any other non-real estate business. As well, you are permitted to invest your funds inside your PREC within a portfolio at any financial institution and invest your funds.

Does a PREC protect real estate and agents from personal liability?

A PREC does not provide protection from personal liability. While the PREC may receive commissions earned by the agent or broker, it is not a vehicle through which he or she provides services. Brokers and agents are liable for the services provided and must meet all obligations and responsibilities to clients.

-Shira Kalfa, BA, JD, Partner and Founder