Effective October 1, 2020, brokers and agents in Ontario can incorporate personal real estate corporations (PRECs) to receive remuneration for their services to their brokerage. The following is a summary of PRECs and the relevant considerations that may apply.
Why would I want a PREC?
The primary benefit of a PREC is the ability to defer income tax. 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. While money you later take out of the PREC will be subject to personal income tax, your accountant may be able to advise on additional savings strategies, such as the payment of a salary or dividends.
How do I know if a PREC is right for me?
If you would have funds to reinvest after paying your living expenses and taxes, a PREC may be worth considering. You should speak to an accountant and corporate lawyer to assess whether a PREC makes sense for you.
What are the requirements of PRECs?
PRECs require the agent or broker to be employed (either as an employee or independent contractor) by a brokerage, and to be the only voting shareholder, the sole director, and the president of the corporation. Non-voting shares may be held by other family members. There must also be a written agreement in place to govern the relationship between the agent, the brokerage, and the PREC, among other requirements.
Are there any restrictions on PRECs that do not apply to regular corporations?
There are several. The PREC may not carry on business as a brokerage, nor can it carry on the business of trading in real estate (other than to provide the services of the agent or broker to the brokerage). This will restrict the use of the PREC to buy and sell real estate. The PREC may only receive remuneration that is associated with trading in real estate from the brokerage, and the agent or broker can only receive such remuneration from the PREC or brokerage. Furthermore, the PREC’s name and any advertisements must not suggest it trades in real estate.
Can my existing corporation operate as a PREC?
Yes. However, this would involve amending the existing corporation to turn it into a PREC. Alternatively, to achieve greater flexibility you may wish to incorporate a second corporation to operate as the PREC instead. Please speak to your legal advisor for more information.
Does the PREC provide protection from personal liability?
It does not. While the PREC may receive commissions earned by the agent or broker, it is not a vehicle through which he or she provides services.