Incorporate a Personal Real Estate Corporation – The Essentials

April 6, 2023 | By Matthew Ordower

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Matthew Ordower

Personal Real Estate Corporations in Ontario

Until recently, Ontario Realtors were getting the short end of the stick. 

While other professionals, including doctors, lawyers, dentists and accountants, were able to take advantage of lower corporate tax rates by choosing to operate their practice/profession through a professional corporation, real estate agents could only operate as sole proprietors. This meant that all real estate commissions earned by a real estate agent were subject to tax at their personal tax rates instead of the lower small business tax rate that other professionals were able to take advantage of.

In 2021, a new regulation was introduced under the Real Estate and Business Brokers Act (Ontario) which gave real estate agents in Ontario the right to operate their real estate business through a personal real estate corporation (often referred to as  “PREC”), and have any remuneration owed to them paid by their brokerage to the PREC.  

With the introduction of this regulation, Ontario realtors are finally able to take advantage of the tax savings offered to other regulated professionals.

So, what is a PREC? What are the benefits? And how do you know if this is the right option for you? This article will cover all the information you need to decide whether this is the incorporation for you!

What is a Personal Real Estate Corporation (PREC)?

A Personal Real Estate Corporation (or PREC) is simply a corporation that is incorporated in Ontario but that is subject to certain regulations and restrictions in the way it can be organized, who it can issue shares to and what kind of remuneration it can receive. The PREC must be compliant with the requirements set out in the regulations in order for real estate agent’s brokerage to be permitted to pay the real estate’s remuneration to the PREC.

Although a PREC is not considered a professional corporation under the Business Corporations Act (Ontario), it functions in a very similar way.

How does a PREC need to be organized?

The Real Estate and Business Brokers Act and applicable regulation, prescribes how the PREC must be organized and operate. In particular:

  • The PREC must be an Ontario corporation.
  • The PREC, its controlling shareholder and others must not represent to the public that the PREC trades in real estate. Remember, it is the individual real estate agent (and not the PREC) that is regulated by RECO.
  • A single real estate agent must be the sole director and officer of the PREC.

All of the equity shares of the PREC must be owned by the single real estate agent.  However, A holding company can also own the equity shares of the PREC so long as the real estate agent owns all of the equity shares of the holding company and is the also the sole director and officer of the holding company.  “Equity shares” is defined under the Real Estate and Business Brokers Act as “voting shares”. 

  • Family members may be issued non-equity shares of the PREC or the holding company, as applicable.  “Non-Equity Shares” means “non-voting” shares and “family” is narrowly defined to mean the real estate agent’s: (1) spouse; (2) child(ren); and (3) parent(s).
  • A brokerage can only pay commissions to a PREC for one real estate agent.  This means that if spouses are both real estate agents, each spouse would have to incorporate their own PREC or, if the spouses operate as a team, all “family” commissions could be run through the PREC of one spouse while the other is employed by and is a non-voting shareholder of that PREC.

Why should I incorporate a PREC? What are the benefits? What are the risks?

Now that you understand what a PREC is, it is important to look at the Pros and Cons of incorporating a Personal Real Estate Corporation.

Benefits of Incorporating a PREC:

  • Tax Savings: The main reason a real estate professional will want to incorporate an Ontario Personal Real Estate Corporation is for tax savings.  By incorporating a PREC, real estate agents will be able to take advantage of the small-business deduction that is available on active business income for Canadian Controlled Private Corporations. The corporate tax rate is ~12.5%
  • Tax Deferral: By forming a PREC, real estate agents will also have the ability to leave behind a portion of their business income in the PREC and ultimately defer the payment of personal taxes on this income until the real estate professional decides to pay themselves.
  • Flexibility of Remuneration: PRECs allow you to access different types of payment options. Generally speaking the PREC can pay the real estate a dividend or the real estate agent can be an employee of the PREC and receive a salary.     
  • Income Splitting: Because the regulations allow family members to own non-equity/non-voting shares of a PREC, real estate agents may be able to benefit from certain income splitting arrangements. By issuing family members non-voting shares of the PREC, dividends can be paid to those shareholders in amounts and at times determined by the real estate agent. Those family members will then have to declare the dividend income on their personal tax returns instead of the real estate agents.  Prior to issuing shares to family members or declaring dividends, you should speak to your accountant. Tax rules relating to income splitting are important to understand because the ability to income split with family members is subject to certain restrictions. Make sure you speak to your accountant before deciding to do so.

Costs with Incorporating a PREC:

  • Initial Incorporating Fees and Transitional Costs. First there is the cost of incorporating. There may also be additional costs associated with the transition of your real estate business from a sole proprietorship to a corporation. For example, if you required the paperwork to effect the s.85 rollover.  During the transition to the corporate structure, you would need to close down your existing business registrations/HST numbers and obtain new tax accounts.  
  • Accounting Costs. The negative side of incorporating a PREC is the increased cost and paperwork compared to your everyday sole proprietorship. In addition to the incorporation fees, you may also need to spend more money yearly on bookkeeping and accounting costs for corporate filings.

What is the difference between a PREC and a Traditional Corporation?

As mentioned earlier, a PREC in Ontario restricts who can be a director, officer and/or shareholder. You don’t need a special type of corporation, and can even use an existing Ontario corporation that you have incorporated in the past, so long as it is properly organized in accordance with the restrictions mentioned above (i.e. so long as the real estate agent is the sole director, officer and equity shareholder; and any other shareholders are family members holding non-equity shares.)

Another major difference is liability protection. Similar to professional corporations, real estate agents cannot shield their professional liability. It is the individual real estate agent, and not the PREC, that remains the licensee/registration with RECO and the insured party. Accordingly, when deciding whether to move your estate business from a sole proprietorship to a PREC, the main consideration is your ability to take advantage of the small business deduction which lowers corporate income tax rates on active business income.

How do PRECs work?

When the personal real estate corporation is formed, you have created a new person at law that receives the revenue, pays the expenses and is a separate taxpayer for your real estate business. Once incorporated CRA will automatically assign a new business number to this corporation. Your PREC will need to register for a new HST number and a payroll number, if applicable. ]

Since the PREC, and not the real estate agent, will be receiving the commissions from the brokerage, any money paid to the real estate agent personally will generally be paid from the PREC to the real estate agent by way of dividend or salary.  By leaving money in the PREC (i.e. savings over and above your living expenses), you will be effectively lowering your income tax burden in a given year and can use the savings from that tax deferral for other investment purposes.

Should I set up a holding company to own the shares of my PREC?

Often real estate agents will incorporate a PREC and a holding company at the same time. The holding company will become the shareholder of the PREC instead of the real estate agent personally. The holding structure has benefits if you are planning on purchasing certain types of investment or other property.

The holding company structure allows the PREC to send dividends up to the holding company by way of inter-corporate tax-free dividend. The holding company can then purchase investment property directly.  By setting up this structure, you are keeping your investment properties separate from the PREC and you do not have to pull out the money personally and pay tax on it in order to use it to purchase property.

What is a Section 85 Rollover?

A section 85 Tax Rollover is a special taxing technique. It allows you to transfer assets from a sole proprietorship to a corporation and defer the capital gains tax that could otherwise be payable by a sole proprietorship on the fair market value of the assets being transferred/sold.

If your accountant recommends that you complete a rollover, first you would determine the Fair Market Value of the goodwill of your sole proprietorship real estate business.  You would then enter into an agreement with your PREC whereby the PREC would agree to purchase the goodwill at the fair market value determined.  The PREC would then pay the individual real estate agent for the goodwill by issuing the real estate agent a certain number of shares of the PREC. Your accountant would then be required to file a s.85 form with CRA.

Do I need a Section 85 Rollover?

You should be aware that there may be tax issues to consider when  moving from a sole proprietorship to a PREC. You may need to transfer the goodwill of your business to the PREC on a tax deferred basis by doing a Section 85 rollover. Whether or not a s.85 rollover is advisable or necessary in your circumstances is something that you should discuss with your accountant directly. 

Now that I understand PRECs, what are the next steps to take in order to incorporate it?

Before starting the process of incorporating, it is important to speak to an accountant and a lawyer to understand if a PREC is the right option for you. Although setting up a PREC is simply setting up an Ontario corporation, you will want to make sure that your articles of incorporation authorize the issuance of different classes of equity and non-equity shares in order to give you flexibility for income splitting.  

Once incorporated, you will need to set up a new bank account, obtain a new HST number and Payroll number is recommended by your accountant, inform RECO about your PREC by email, enter into an agreement with your brokerage and the PREC and provide your brokerage with any information they require for compliance purposes.

Here at Ordower Law, we are committed to ensuring that this process is as smooth as possible for you. To help you with incorporating your PREC, we offer a full service offering including incorporation and organization of your company, professional intros, informing RECO about your corporation and traditional corporate services beyond that.

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.