The Ontario government recently made an amendment to the Real Estate and Business Brokers Act, allowing real estate agents to incorporate their practices through the use of Personal Real Estate Corporations (PREC). This move brings Ontario on par with other jurisdictions that have similar legislation, including Alberta, British Columbia, Saskatchewan, Manitoba, Quebec, and Nova Scotia.
The new rules allowing real estate agents to incorporate gives them the opportunity to reap the benefits of owning a corporation, including a lower tax rate, the opportunity for tax deferral and income splitting, and deductions.
If you’re a real estate agent in Ontario and are considering incorporating your practice, this article will cover the basics of what you need to know.
What is a Personal Real Estate Corporation (PREC)?
PRECs were established to allow real estate agents the same benefits of incorporation that many other professions, like law, engineering and accounting, already have.
The corporation is referred to as a personal real estate corporation (PREC)
Previously, real estate agents operated as sole proprietors, but the ability to operate as a corporation, which is referred to as a Personal Real Estate Corporation, gives them access to benefits afforded to other corporations.
Requirements of PRECs
PRECs are incorporated under the Business Corporations Act in Ontario. While they have similar benefits to other corporations, a PREC is subject to a few additional requirements, including that the real estate agent establishing the corporation must:
- Own all equity and voting shares
- Be the sole director of the PREC
- Be the president of the PREC
With this style of corporate structure, non-equity shares must be owned by the real estate agent or a family member (this could be done through a trust). There also cannot be any written provision or arrangement that restricts or transfers any part (or all) of the controlling power away from the real estate owner.
Can a real estate team form a PREC?
Given a PREC must be a single-person corporation, it begs the question: what about real estate teams? Unfortunately, teams cannot get together and form a corporation.
Since each PREC has to have a sole real estate agent who owns all the voting shares, each real estate agent on a team must establish their own PREC and cannot own one jointly.
What about real estate investors?
Real estate investors cannot use a PREC to reap the benefits of incorporation from their real estate investments. A PREC is intended for real estate agents only.
Advantages of PRECs
Here are the advantages to establishing a PREC.
Sole proprietors are taxed at a higher rate than corporations because they are taxed as individuals. When a real estate agent opens a PREC, they can take advantage of lower corporate tax rates.
The corporate tax rate in Ontario is 11.5 per cent, which is lower than the personal tax rates for individuals who make over $150,000. You also have to factor in federal taxation on top of that, which is 15 per cent for corporations. Federal tax starts at 15 per cent for individuals and goes up to 33 per cent.
Typically, real estate agents pay the personal income tax rate on all income earned. If you are a high-earner, this can mean a significant chunk of your income goes towards the government.