Personal Real Estate Corporations (PRECs): Access To Incorporating A Big Step Forward For Realtors

Real estate salespersons and brokers that are registered with the Real Estate Council of Ontario (“Registrants”) may now incorporate by setting up a Personal Real Estate Corporation (“PREC”). In a long-awaited step, in the Spring of 2020 the Ontario legislature passed Bill 145, Trust in Real Estate Services Act, 2020 (“Bill 145”), which amends the 2002 Real Estate and Business Brokers Act (the “Act”). The sections of the Act allowing Registrants to operate through a PREC came into force on October 1, 2020.

Necessary criteria to be a PREC and conditions to be exempt from Registration with RECO

A corporation must meet 6 criteria under to qualify as a PREC. These criteria are aimed at two main objectives: (a) the Registrant must be the only person in control of the corporation, and (b) the corporation must not offer other services than those for which the Registrant is registered for. The criteria include:[1]

• The PREC is incorporated or continued under the Ontario Business Corporations Act.
• The Registrant owns all the equity shares.
• The Registrant is the sole director, president, and officer of the corporation.
• The Registrant’s powers to manage or supervise the affairs of the corporation are not restricted.

If a corporation is eligible to be a PREC, there are several ongoing conditions that a PREC must meet. [2] Some of these conditions are that:

• The controlling shareholder (the Registrant) is employed by a brokerage, and that the PREC does not carry any other business other than providing the services of the Registrant to the brokerage.
• The PREC does not hold any money or other property of any person in connection with trading in real estate, on behalf of the brokerage, directly or indirectly.
• There is a written agreement between the PREC, the Registrant, and the brokerage governing the relationship between the three entities.

Lastly, before a PREC may receive any remuneration, the Registrant must notify RECO, in writing, of the PREC’s legal name and its address for service.

There may be significant benefits to incorporating as a PREC

Operating through a PREC may provide a Registrant more options for financial and tax planning. These options should be discussed with a financial advisor. In general, some benefits of these options may include:

i. Ability to be paid through the corporation

Brokerages may pay the corporation instead of the individual as long the PREC meets the three criteria set out in section 4 of Regulation 536/20: (1) the PREC is exempt from registration; (2) the remuneration was earned by the PREC’s controlling shareholder; and (3) the brokerage confirmed in writing that the 11 conditions, which entitle the PREC to exemption, are met.

ii. Controlling income tax rates

Corporations are taxed at a lower rate. Depending on the circumstances, this may allow a Registrant to defer some tax by paying the small business tax rate of 12.2% instead of the highest personal tax bracket of 53.53%. Payment of personal income tax would be triggered only when additional funds are withdrawn from the corporation for personal use. Without a PREC, Registrants’ earnings are taxed at the personal rate for their entire annual income.

iii. Ability to split income with family members

Income splitting allows a family to distribute income amongst members, in a way that reduces the overall tax paid on that income. “Family member” may only be a spouse, child, or parent.[3] The two most direct ways of doing this are: (1) by making family members non-voting shareholders and issuing dividends; or (2) by paying a fair wage to a working family member, which in turn can be deducted as a legitimate corporate expense.

Registrants must be aware about the tax on split income (TOSI) rules, however. Any income paid to a family member, whether through dividends or wages, must be proportional to their contribution and role in the business. Otherwise, the income may be subject to the tax on split income (TOSI) rules and in turn be taxed at the highest marginal tax rate.

iv. Access to the Lifetime Capital Gains Exemption

If the PREC qualifies as a “qualified small business corporation”, it may have access to the Lifetime Capital Gains Exemption. This is currently $883,384 for 2020. Upon selling the shares of a PREC, each Canadian resident shareholder may be exempt from tax on the first $883,384. In other words, if you sell your PREC, the first $883,384 would not be taxed.

The foregoing information provides only an overview of some changes to Ontario real estate legislation as of the date this information has been provided. Specific legal advice should be obtained. Please contact Robert Kinghan, Partner & Head of Business Law Group, or Brian Kells, Associate, if you wish to obtain legal advice specific to your needs.

[1] O Reg 536/20: Personal Real Estate Corporations at s 2.

[2] O Reg 536/20: Personal Real Estate Corporations at s 3.

[3] O Reg 536/20: Personal Real Estate Corporations at s 1.