What is a Personal Real Estate Corporation?
A Personal Real Estate Corporation, or PREC for short, gives individual real estate agents the ability to incorporate. This allows them to take advantage of benefits afforded to standard business corporations. Many other regulated professions, such as lawyers and accountants, can also incorporate in this way.
Where can I incorporate a PREC?
Real estate professionals in the provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Saskatchewan, Quebec, and now Ontario can incorporate a PREC.
PREC in Ontario
As of October 1st, 2020, real estate professionals in Ontario can now incorporate by establishing a Personal real Estate Corporation. You can read the full details on PREC in the PREC Ontario Regulation. This is great news as it allows Ontario Real Estate agents to access the benefits of incorporation afforded to many other professionals in the province.
Previously, Ontario’s real estate professionals were prevented from incorporating a PREC by the Real Estate and Business Brokers Act (REBBA). Bill 104, the Tax Fairness for Realtors Act, was introduced in 2017 to permit Ontario real estate agents to incorporate a PREC; with its passage earlier this year, Ontario joins the list of provinces allowing the incorporation of a PREC.
What are the Criteria for a PREC in Ontario?
A corporation must meet all the following criteria to be a PREC:
- The corporation must be incorporated or continued under the Ontario Business Corporations Act.
- The corporation has one controlling shareholder, being a broker or salesperson who legally and beneficially owns, directly or indirectly, all of the voting shares of the corporation.
- The controlling shareholder must be the sole director of the corporation.
- The president is the only officer of the corporation and the controlling shareholder must hold this office.
- Any non-voting shares of the corporation must be (a) legally and beneficially owned, directly or indirectly, by the controlling shareholder or a spouse, child or parent of the controlling shareholder; or (b) held in trust for one or more minor children of the controlling shareholder.
- There are no agreements or arrangements that restrict or transfer any of the sole director’s powers to manage or supervise the management of the corporation’s business and affairs.
The full list of qualifications and conditions can be read in the PREC Ontario Regulation.
What are the advantages of a PREC?
The advantages of Incorporating a PREC closely parallel the benefits of incorporating any other business. For most agents considering incorporation, the primary motivation will be the tax deferral, however other benefits may also apply depending on the circumstances of your real estate business. In all cases, maximizing the benefits of incorporation (and avoiding negative tax implications) requires a strong financial and tax plan. Be sure to speak with your accountant to get help with navigating the complexities of planning for a PREC.
- Tax Deferral: The primary benefit of a PREC is the tax deferral from a lower corporate tax rate. In Ontario, the Small Business Deduction allows up to $500,000 of business income to be taxed at a rate as low as 12.5% (in 2020), compared to the maximum 53% tax rates on personal earnings. Note that any amount withdrawn as salary or dividends is still taxable. As such, a PREC becomes more advantageous the more money you can afford to keep in the company. Tax deferral is beneficial for at lest two reasons:
- Investment and Estate planning: You can take advantage of the tax deferral through a PREC to invest excess income in the corporation into various instruments, growing the capital over time. A few examples of where a PREC can invest include regular investments such as stocks and mutual funds, directly into rental properties, life insurance, or an individual pension plan.
- Strategic withdrawal: Canada’s marginal income system varies your tax rate based on your earnings for the year. As such, planning to withdraw funds in a low-income year will lead to additional savings from the lower rate.
Other advantages of incorporating a PREC include:
- Income Splitting: under some circumstances, a PREC offers the opportunity to income split with lower-earning family members through dividend payments. This approach would effectively reduce the family's overall tax burden. Note this must be done in compliance with Tax on Split Income (TOSI) regulations, which had a major impact on the scope and availability of income splitting.
- Dividends over salary: Normally, self-employed real estate professionals must pay their CPP contributions for both employer and employee. Since a PREC offers the option of paying out dividends instead of a salary, the CPP contribution is not required (however, take note of the impact on future pension payments).
- Ability to sell the PREC: A portion of the sale of a PREC can be realized tax-free, provided certain conditions are met - you should consult with your legal and financial professionals to find out more.
Disadvantages to consider
- Setup costs: Incorporation fees for a PREC can range from $1,000 to $2,500, in addition to any legal costs.
- Administration: A PREC is a separate corporate entity, and requires filing its own corporate tax returns which differ significantly from personal tax returns. This means maintaining additional records.
- Additional Costs: Accounting, legal, tax, and other fees may add up, however, with a proper plan in place the benefits of incorporation are far more significant than these added costs.
- Compliance: Compliance requirements are stricter for corporate entities. There is also the potential for audits by the Canadian Revenue Agency. As such, it is essential to have a well thought-out accounting and bookkeeping solution in place to maintain compliance without being overly resource-intensive or burdensome. If you need help setting up an efficient solution, we can help - we have over 25 years of experience helping small and medium-sized corporations setup and optimize their workflows to save costs and leverage the latest cloud-based accounting solutions.
When should I incorporate?
Incorporation is only advantageous if you can afford to keep some of your profits in the PREC, meaning that agents that require all their earnings for personal use do not stand to benefit from incorporation.
However, in most situations where incorporation is the goal it is better to incorporate sooner than later. For one thing, fees and costs associated with incorporation depend on the value of a business, so they may be lower earlier on.
Second, it will be easier to adjust to manage a corporation while the business is earlier and smaller, and being incorporated in advanced prepares you for periods of unexpected growth; you may not have the time to incorporate to protect commissions from unanticipated sales.
Finally, the amount of profit required to make incorporation a worthwhile endeavor may not be as high as many believe, and with the other possible benefits in consideration, it may be worth to incorporate earlier than you expect.
Is PREC right for me?
Ultimately, your unique circumstances dictate when you should incorporate as a real estate agent. Just because the option is now available does not mean it is the right at this moment, although it is never a bad idea to research and plan for the future.
Incorporating a PREC may provide tax benefits to real estate professionals looking to maximize their commissions. However, to truly benefit from a PREC a strong plan tailored to your circumstances is required.
Contact us today to find out if a PREC is right for you and let us help you develop a strategy to best take advantage of the benefits of incorporating as a real estate professional.