Personal Real Estate Corporation: How it Works

Traditionally realtors, real estate agents and brokers, were not allowed to create a corporation and enjoy tax planning benefits that were enjoyed by other professionals like doctors, lawyers, accountants, etc. With the introduction of the Trust in Real Estate Services Act (TRESA) since October 1, 2020, managing brokers, associate brokers, and representatives are all eligible to operate under a Personal Real Estate Corporation (PREC).

The incorporation offers various advantages, most important of which is tax planning opportunities. This allows a real estate professional to pay as low tax as 12.2% whereas some realtors in Ontario might be paying personal tax as high as 53.53%.

We have discussed this and other incorporation benefits in detail in another article “Advantages Of Incorporation! You Can Cut Tax Rate To 12.2% From 53.53% By Incorporating!“

In this article we will only discuss conditions and requirements that are specific to PREC only.

Controlling individual:

To be eligible for forming a PREC, the controlling registrant must be an existing member of the RECO. As such, a realtor can be the only person owning voting shares or director of a PREC.  Other family members can join the corporation, but only as non-voting shareholders.

Business restrictions:

Even though the corporation is called a Personal Real Estate Corporation, there is no restriction on the business or service a PREC can provide. The term PREC is misleading. The only restriction, to be reflected in section 5 of Article of Incorporation, is that PREC can not engage in “business of trading in real estate” as discussed in following sections.

Personal Liability and monitoring by RECO:

A PREC, is a separate legal entity, established by real estate professional and meets the following conditions:-

1. The corporation is incorporated or continued under the Ontario Business Corporations Act.
2. The corporation has one controlling shareholder who must be registered as a broker or salesperson.
3. All the equity shares of the corporation are legally and beneficially owned, directly or indirectly, by the controlling shareholder.
4. The sole director or the president of the corporation is the controlling shareholder.
5. Each non-equity share of the corporation is legally and beneficially owned, directly or indirectly, by the controlling shareholder or a family of member of control shareholder (spouse, child or parents)
6. There is no written provision by agreement or arrangement that restricts or transfers the powers of the sole director to manage or supervise the management of the business and affairs of the corporation.

 

PREC’s exemption from registration with RECO:

A PREC is exempt from registration with RECO if it meets all of the following conditions:

1. The PREC’s controlling shareholder is employed by a brokerage to trade in real estate.
2. The PREC does not carry on the business of trading in real estate other than providing the services of its controlling shareholder to the brokerage.
3. The PREC, its controlling shareholder, its non-equity shareholders, its employees or its agents do not represent to the public in any manner, directly or indirectly, that the PREC carries on the business of trading in real estate.
4. The PREC does not carry-on business as a brokerage.
5. The PREC does not receive, directly or indirectly, remuneration for trading in real estate from any person or entity other than the brokerage.
6. The controlling shareholder does not receive, directly or indirectly, remuneration for trading in real estate from any person or entity other than the PREC or the brokerage.
7. The PREC does not, on behalf of the brokerage, directly or indirectly hold any money or other property of a client, customer or other person in connection with trading in real estate.
8. There is a written agreement between the PREC, the controlling shareholder and the brokerage governing the relationship between the brokerage, the corporation and its controlling shareholder. Under the agreement, the PREC agrees:
   • Not to hinder or obstruct the brokerage or its broker of the record, or the controlling shareholder in the performance of their duties and under legislation, and
   • To provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of the record to comply with their duties to make sure that the controlling shareholder is complying with its duties under legislation.

Payment of remuneration to PREC:

A brokerage may pay remuneration to a PREC if:-

1. The PREC that is exempt from registration (as discussed above); and
2. The remuneration has been earned by the PREC’s controlling shareholder; and
3. The brokerage has confirmed in writing that the conditions for exemption (as discussed above) are met.

Remuneration payment to PREC by the Brokerage:

A broker or salesperson who is the controlling shareholder of a PREC that is exempt from registration is entitled to and may accept remuneration for trading in real estate from the PREC if the following circumstances exist:

1. The brokerage that employs the broker or salesperson to trade in real estate pays the remuneration for the broker or salesperson to the PREC instead of paying to the broker or salesperson.
2. The amount of the remuneration paid by the PREC to the broker or salesperson is not greater than the amount of the remuneration received from the brokerage for the broker or salesperson.

Notice to the RECO:

Before a PREC receives any remuneration from a brokerage, a broker or salesperson who is the controlling shareholder of a PREC that is exempt from registration shall provide written notice to the RECO of the following information:

1. The legal name of the PREC.
2. The address of the PREC.

Also, the controlling shareholder shall notify the RECO in writing of any change to the above information or in the circumstances that would affect the PREC’s eligibility for the exemption from registration within five days after the change takes place.

Additional Requirement on the controlling individual:

The controlling shareholder of PREC shall ensure that the corporation, if not registered as a brokerage, does not perform an action for which registration is required.

Ready to incorporate?

The above information presents a general overview, there are many factors that must be taken into account when considering forming a PREC including your specific personal situation. It is strongly recommended that before taking final steps, you take a professional advice on suitability of PREC, incorporation, steps after incorporation, etc. Our professional team at Source Accounting Professional Corporation, CPA, is ready to guide and help you. Call at 647-930-8130 for initial consultation.

 

  

 If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting. Source Accounting is an accounting firm in Mississauga, dedicated to small and medium size business, providing tax, accounting, bookkeeping, payroll solutions and etc. And if you find this post helpful, please let us know in your comments.

 

 

 

Disclaimer: The above contents are provided for the general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice; nor can it or should it be relied upon. Please contact / consult a qualified tax professional specific to your case.