This article is the first in a two-part series from SM Legal and O’Reilly Chartered Professional Accountants, co-authored by Samuel Michaels and Brock O’Reilly.
Amendments under Trust in Real Estate Services Act, 2020
Real Estate Agents can now open a Personal Real Estate Corporation (a “PREC”). A PREC will provide the Agent an extra layer of liability protection. The PREC also offers new tax deferral opportunities for Real Estate professionals.
What are the Benefits of Incorporating a PREC?
Real Estate Agents can now accept payment from their brokerage through their PRECs. This will permit new tax deferral opportunities. The Agent is no longer required to declare payments as “income”. The PREC will instead receive payments as “revenue” and can then elect to pay the Agent a salary or through dividends.
PRECs are also separate legal entity from their owners. The Agent therefore has an additional layer of liability protection. The PREC exists separately from the Agent, with its own rights and liabilities. Further, PRECs are taxed separately from their owners. In Ontario, PRECs enjoy tax rates that are generally lower than personal income tax rates.
Tax Benefits of Incorporating
The highest personal tax rate in Ontario is 53.5%. The corporate tax is rate 12.2%. This 12.2% tax rate is a “flat” tax rate meaning the tax rate does not change on the first $500,000 of net income in the corporation. This provides a significant opportunity for real estate agents to defer tax and invest these tax savings directly back into business operations or begin building a corporate investment portfolio.
Let’s take a look at an example of a real estate agent who is operating as a sole proprietorship (unincorporated entity) compared to a real estate agent who has taken advantage of the PREC rules and is now operating via a corporation. Each are earning $175,000 of net income from real estate commissions.
| Sole proprietor | PREC | |
| Net income | 175,000 | 175,000 |
| Corporate taxes paid | – | (21,350) |
| Personal taxes paid | (63,350) | (1,150) |
| Net after-tax funds | 111,650 | 152,500 |
| Less living expenses | (40,000) | (40,000) |
| Remainder available for investment | 71,650 | 112,500 |
It is clear from the example that a real estate agent operating via a PREC will have over $40,000 more of cash remaining after living expense (estimated modestly at $40,000) and taxes are paid, than the real estate agent operating as sole proprietor. The PREC also allows for various other tax planning measures and flexibilities which are not offered when operating as a sole proprietorship.
Legal Considerations for PRECs
Whilst PRECs are exempt from registration under REBBA, PRECs can only have one (1) controlling shareholder, which is the registered broker or salesperson. PRECs are also subject to other conditions set out by the Real Estate Council of Ontario (“RECO”), such as:
- PRECs can only be incorporated under the Business Corporations Act (Ontario);
- The controlling shareholder must also be the president, sole director and officer of the PREC;
- If there are non-equity/non-voting shares, they can only be owned by the broker or salesperson’s immediate family members;
- The PREC cannot operate as a brokerage, the controlling shareholder must be employed by a brokerage;
Additionally, brokers and salespersons cannot advertise using their PREC name.
The second phase of the TRESA amendments are expected to be introduced within the next few months. This phase is expected to include enhanced disclosure, new reporting requirements, and additional authority RECO authorities. The second phase will also include further education, certification, and training requirements for real estate professionals
For more information on setting up your PREC, contact sam@smlegal.ca. For tax planning advice for your PREC, contact brock@oreillycpa.ca.