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Save 35%+ on Your Tax Bill By Registering A PREC

What is PREC?

A personal real estate corporation, or PREC, allows a real estate
agent to earn their business income through a corporation.

Tax Deferrals

One of the primary benefits to incorporation for a realtor is the ability to defer
income tax.

The tax rate on small business income up
to $500,000 in Ontario is 12.2%. In comparison, personally earned income at $50,000 in Ontario is taxed at 29.65%, which increases with income up to 53.53% for income over $220,000.

Income Splitting

Ontario realtors can name family members as shareholders of their PREC as well, but
the realtor must own all voting shares of the company.

Non-voting shares can be issued to others, and dividends can be paid to them.

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How does the PREC allow income splitting?

The existence of a separate corporate entity (the PREC) that receives business income allows that corporation the ability to distribute its revenues and income in more ways than an individual can. The PREC regulations allow family members (defined broadly to include blended families), being children, parents and spouses, to own non-voting, non-equity shares of the PREC. The controlling Registrant (called the “controlling shareholder” in the PREC Regulation) can own voting, equity shares. The PREC can thus allocate its business income to employees (including the controlling Registrant, family members and others) as salary and issue dividends to any shareholder of the PREC. The cumulative effect of such income splitting on the taxes payable (in both the long and short term) by the controllingRegistrant, the PREC and those shareholders depends on many factors and tax advice from an accountant or lawyer should be sought to ensure you get the tax consequence you wish. The tax rules are complicated and splitting income could result in more tax being levied.

Can I advertise using the name PREC?

A registrant may be able to use an existing corporation if it meets the criteria and conditions of a PREC (refer to checklist). There may, however, be limitations with other types of registered businesses that may prohibit its use.

Can a PREC be used for passive investment purposes?

Yes, a PREC is a regular Ontario Business Corporation Act business corporation and while there are limits on its ability to receive compensation for a trade in real estate, there are no requirements that it refrain from carrying on other activities, such as passive investing. There may be tax and other implications to doing so however and you should consult with a lawyer or accountant for tax advice.

What are the insurance implications of using a PREC?

The PREC is an additional separate entity or person in the eyes of the law. It can be sued and since it will be providing the services of the controlling Registrant, your insurance broker(s) should be consulted with respect to appropriate insurance coverage for the PREC in addition to any existing insurance an individual RELATION may have.

What name can I use for the PREC?

There are no limitations or specific requirements with respect to the name of a PREC other than those imposed on any business corporation incorporated or continued under the Ontario Business Corporations Act. The name must meet the normal rules for corporate names and should not suggest that the PREC itself is trading in real estate. An example of an appropriate name would be the individual Registrant’s name followed by a “Professional Real Estate Corporation”. For example: “Jane Doe Professional Real Estate Corporation”.

Who can be a non-equity shareholder in my PREC?

Members of your family, which includes your spouse, children, a trust for a minor child or children (under 18 years of age) and parents. The definitions of who a spouse, child and parent is are fairly broad. The definition of spouse is “a person to whom the shareholder is married or with whom the shareholder is living in a conjugal relationship outside marriage.” The definition of a child includes one you have “demonstrated a settled intention to treat as a child of his or her family, except under an arrangement where the child is placed for valuable consideration in a foster home by a person having lawful custody.” The definition of a parent includes a person who has “demonstrated a settled intention to treat [you] as a child of his or her family, except under an arrangement where the child is placed for valuable consideration in a foster home by a person having lawful custody.” In addition, a trust for minor (under 18) children can own non-equity shares of a PREC.

If I am a member of a team, can I use my team name when naming my PREC?

Yes. However the name of your PREC must meet the normal requirements for a corporation, which includes the requirement. that it be distinct and not be confusingly similar to another corporation’s name. This means your other team members may not use the same name or a confusingly similar name. You will therefore need to distinguish your PREC’s name from any name other team members choose for their PRECs.

If I am a member of a team that has formed a PREC, will I be paid by the PREC?

No. This question is likely based upon a misunderstanding of what a PREC is. A group of REALTORS cannot together form and use a single PREC. The Regulations contemplate an individual RELATE forming his or her own PREC. Each PREC must be controlled only by one (1) individual RELATOR and (with the exception of a RELATION who is also a family member and then only with respect to non-equity shares) you cannot make another RELATOR a
shareholder of your PREC. The PREC regime exempts the PREC from registration in exchange for the ability of RECO to identify and discipline one, and only one, controlling Registrant for that PREC in the event the PREC is accused of inappropriate behaviour. Please note however that this does not preclude teams from working together. Individual REALTORS can continue to work together even if one or all of them utilize PRECs, but their contractual arrangements with each other and their brokerage may need to be adjusted.

If I am a non-equity shareholder in a PREC, can I engage in activity's related to Real Estate, like flipping and selling a home?

It depends on whether you are a Registrant or not. A non-equity shareholder that is a Registrant is entitled to trade in real estate. A non-voting shareholder in a PREC is not given any special status under TRESA. That individual does not become a Registrant. The PREC itself does not become a Registrant with RECO. The PREC is exempt from the prohibition against receiving compensation for trading in real estate, but only if it meets all of the rules in the Regulations, which effectively require it to provide only the controlling Registrant’s services when trading in real estate. A non-equity shareholder that is not a Registrant gains no additional abilities or rights as a result of owning shares in someone else’s PREC. If the non-voting shareholder is a Registrant, a sales person or broker, she or he can trade in real estate. A non-equity shareholder that is not a Registrant may, as he or she always could, engage in trades in real estate that are exempt under section 5 of the Act from the prohibitions against trading real estate. For example, if the non-voting shareholder meets all of the requirements set out in subsection 5(h) he or she may be able to trade “on the person’s own account, in respect of the person’s interest in real estate”.

If I am transferring to a different brokerage, do I need to also transfer the license of my PREC?

A PREC does not need to be licensed. If you transfer to a different brokerage, your PREC will need to enter into a new agreement with the brokerage which meets the requirements found in TRESA and the regulations and give appropriate notice.

Do the restrictions from RECO or in the TRESA regulation have to be included in a PREC's articles of incorporation?

The TRESA regulations do not require any of criteria for a corporation to be a PREC as defined in TRESA to be included in the Articles of Incorporation of that corporation. You should consult with your lawyer on whether doing so would provide more advantages than disadvantages in your circumstances. While doing so provides clarity and likely prevents inadvertent changes that would disqualify your PREC, there may be other reasons that this would be undesirable.

Can a PREC be used to defer income tax payments? For example, can the PREC retain money from sales in a high-income year to be paid out in a low-income year?

A PREC is not obligated to pay out all of the revenue or income it generates in the same financial year. Whether that results in a material tax deferral is dependent on the factual circumstances of the PREC, its controlling shareholder (the Registrant) and the other shareholders. Advice from a lawyer and/or an accountant is strongly advised.

What can a realtor maximize the tax allocation of commission revenue to a PREC for existing listings and pending deals at the time the PREC is incorporated?

The services of a RELATION commence with the signing of an listing or representation agreement with the client. This applies whether the client is seller or buyer, landlord or tenant, or any other person seeking to trade in real estate. The work performed by the RELATION between the signing of that agency agreement and the time the commission becomes payable is the REALTOR’s work-in- progress. A RELATOR may sell their work-in-progress to their PREC. If the PREC issues shares to the RELATOR as payment of all or part of the purchase price of the work-in-progress, the RELATOR and the PREC may jointly elect that the sale price of the work-in-progress is generally an amount between the cost amount of the work-in-progress and the fair market value of the work-in-progress. The lower limit of the cost amount of the work-in-progress will be increased if the portion of the sale price paid by the PREC in a form other than shares exceeds this cost amount. The cost amount of the work-in-progress to the RELATOR is generally simply the out-of-pocket costs you have incurred in relation to a particular client to that point in time. This may include photography costs, advertising costs, listing fees, and mileage. It most cases, it should not include any amount for the time spent by the REALTOR. If it is possible to elect that the sale of work-in-progress to a PREC occurs for tax purposes at the cost amount, that means that the commission revenue less the applicable cost amount for that transaction will be PREC revenue. The PREC would claim in those ideal circumstances, as an expense, the cost amount that will in turn be paid to the REALTOR as a reimbursement of the tax-deductible expenses incurred by the REALTOR prior to the incorporation of the PREC.

Advice from your tax advisors on whether this approach is possible for you and what documentation is appropriate is very important. There are very specific tax rules for the valuation of work-in-progress of a professional business for which you should seek the advice of a tax lawyer or accountant. For example there is a possibility that the fair market value of the work-in-progress could be lower than the cost amount. This may arise if the closing of the transaction was conditional on various factors, such as financing, due diligence, home inspections etc. If that is the case, you may be required to elect the lower of the two amounts. In addition, there may be Harmonized Sales Tax implications. Most importantly, the Canada Revenue Agency election form referred to above (currently Form T2057) must be filed on or before the earlier date upon which either the REALTOR or the PREC is required to file an income tax return for the year in which the sale of work-in-progress occurs.

Has the Canada revenue agency provided direction on PRECs and how my income will be taxed if I use a PREC?

The Canada Revenue Agency rarely provides advice on the impact of changes to legislation and regulation that it did not initiate, particularly those of provincial legislatures. It will, however, respond to technical interpretation requests if all of the necessary individual facts are provided, including all of the individual circumstances and details of the contractual relationships. You may wish to consult with a lawyer on whether you should seek such a technical interpretation.