Personal Real Estate Corporation (PREC) Allowed in Ontario
Effective October 1, 2020, realtors are allowed to incorporate a personal real estate corporation (PREC) in Ontario. This is a big win for Ontario real estate agents as they to join their peers in other provinces who have benefitted from PRECs for years. If you are an Ontario realtor, keep reading to learn if a personal real estate corporation is right for you!
What is a Personal Real Estate Corporation (PREC)?
A PREC is a corporation which is permitted to receive remuneration from a real estate brokerage for amounts earned by a real estate salesperson. This essentially allows real estate agents to incorporate their business.
Can my spouse own shares of my PREC?
It is required that the registered real estate salesperson who controls the PREC own all the equity shares. However, family members such as spouses, children or parents can own non-equity shares. Allowing family members to own shares can be advantageous for tax planning purposes. It is important to have the right share structure put in place when setting up the personal real estate corporation. Full details of the Ontario PREC legislation can be found here.
What are the potential tax benefits of a Personal Real Estate Corporation?
A personal real estate corporation can help Ontario realtors to:
- Defer taxes
- Optimize their investment strategy (for example, invest in real estate)
- Split income with family members
- Save taxes when selling the business
- Gain flexibility when it comes to remuneration planning
How much should I earn before incorporating?
There is no hard and fast rule. Generally, the more income you can leave in the company or split with lower income family members, the more worthwhile a PREC becomes.
For example, I have spoken with part-time real estate agents who profit $40,000 from selling real estate. They have full-time corporate jobs and do not require their real estate commissions to live. Currently, they pay personal tax at the highest marginal tax rate in Ontario of 53.53%. If they leave $40,000 in the PREC, the profit is only subject to a corporate tax rate of 12.2%. The difference in rates of 41.33% on $40,000 of profit means that they can defer over $16,000 of taxes in one year!
Depending on your expected future profits, family situation, cash needs and investment plans – this tax deferral can be more than enough reason to incorporate for many realtors.
Realtors should speak with an accountant to decide if a PREC is right for them.
How can I use a PREC to grow my real estate investment portfolio?
I have found that many realtors are avid real estate investors themselves. A PREC paired with a well-planned investment structure can help real estate agents save faster for their next purchase. It is important to discuss your needs with a tax accountant to determine the best structure for your situation.
Back to my example above, the realtor may want to consider setting up a separate holding company for investing. A holding company allows the realtor to reinvest after-tax profits from the PREC in investment properties without triggering personal tax. This means $16,000 more each year for your next down payment. Now instead of $40,000, imagine if the realtor profited $60,000 or $100,000!
Are there any tax consequences when I transfer my real estate business to a PREC?
You are considered to have sold your real estate business to the PREC at fair market value for tax purposes. If there is value in your real estate business, you may be considered to have gained on this transaction and be liable for taxes. The good news is that there are elections you can file with the Canada Revenue Agency to defer the tax and legal documents you can put in place to protect yourself. It’s not as simple as just incorporating a new company. Make sure you work with an experienced team of accountants and lawyers.
What are the potential disadvantages of incorporation?
- Setup costs (legal and accounting)
- Costs of annual accounting and tax filings
- Time required for administrative tasks to maintain the corporation (For rules on advertising, naming convention and licensing – visit RECO’s website.)
I have spoken to some realtors who know they can benefit from a PREC, but are uncertain if they should incorporate sooner rather than later due to annual costs. Keep in mind that a corporation’s first tax return is typically not due until 18 months after incorporation. This means you could be enjoying the benefits of a PREC long before having to worry about tax filings.
