It is common for those who own a small business to seek out incorporation. What you might not know though, is that certain professions are allowed to form a personal corporation. This includes doctors, lawyers and real estate agents.
Starting a Personal Real Estate Corporation (PREC), in particular, is made possible by the Trust in Real Estate Services Act, 2020 (TRESA). It is governed by legislation which Ontario passed on October 1, 2020 – Regulation 536/20. This legislation allows real estate salespeople and brokers to set up an Ontario corporation and use it for self-employed revenue.
If you are thinking about setting up your own Personal Real Estate Corporation, here is what you need to know.
What is a Personal Real Estate Corporation?
A PREC is a form of business incorporation that is a legal entity separate from you as a real estate professional. A PREC allows you, as a real estate professional, to receive remuneration from a brokerage that you earn.
A PREC allows you to take advantage of certain income tax benefits which businesses receive. It can only be controlled by one registrant, the controlling registrant or controlling shareholder. In this title role, you make all the important decisions in the corporation.
The brokerage that you work with pays you through your PREC for trading in real estate. As a legal corporation, your PREC will be able to independently earn and receive revenue, and will be able to pay expenses, owe and pay taxes to the CRA, and file a tax return.
While you do not need to register your PREC with the Real Estate Council of Ontario (RECO), you as the controlling registrant must be registered, either as a salesperson or a broker with RECO under TRESA. You will also have to inform RECO of your personal corporation name and address or you will not be able to receive compensation for a trade in real estate.
How is a PREC Different from Private Corporations?
Like other corporations, PRECs are incorporated under the Ontario Business Corporations Act. However, PRECs differ from traditional private corporations in a few ways:
- Only realtors are allowed to be voting shareholders of the company.
- Either you or your PREC or both are subject to RECO regulations.
- A PREC can only be used under specific rules.
- As a PREC, you remain liable for the services you provide to customers.
- You cannot delegate control of the PREC to someone else.
Do you Qualify to Create a PREC?
In order to create a PREC, there are a few requirements that need to be met in order to qualify as a controlling registrant.
You must be a registrant with RECO and employed by a brokerage in the capacity of an independent contractor rather than an employee or officer. In addition, the PREC you are setting up must not be a brokerage itself.
Your PREC must not carry on any additional activities other than the services you need to provide in order to be employed by a brokerage.
There must also be an agreement that defines the relationship between your brokerage, you as a controlling registrant, and your PREC.
Benefits of Establishing a Personal Real Estate Corporation
Financially, there are a number of benefits for establishing a PREC, especially for those who earn a high income.
- PRECs can benefit from a tax deferral.
- Your income can be split and distributed amongst family members.
- You can benefit from flexible payment options (salary, dividends, and bonuses).
- PRECs allow you to engage in other income-earning small business activities
- You can take advantage of the Lifetime Capital Gains Exemption for small businesses.
- You can claim deductible business expenses.
Other than the general limits on receiving real estate trade compensation, there are no other regulations that prevent your PREC from passive investment, owning property and commercial real estate, or holding insurance policies.
In addition to income splitting with family members, your PREC allows those members to hold non-voting/non-equity shares of the company.
PRECs appeal to consumers by providing them with the information necessary to become active decision makers in real estate purchases and sales. This is because regulated PRECs are required to ensure their clients receive detailed information on your role as a real estate professional.
Another benefit is that a PREC strengthens the professional integrity of real estate professionals. By operating under the regulatory changes made to improve ethical behaviour and requirements, PRECs are acting accordingly and within Ontario legislations.
Running a PREC also minimizes the administrative and license registration burden. For instance, dual registration for you and your PREC is not required. Additionally, your PREC does not need to pay annual licensing fees. Note that you, as the controlling registrant, however, must be registered with RECO.
Should you Start a Personal Real Estate Corporation?
Ask OMQ. The regulations that govern professional corporations can be slightly different across Canada. Thus, if you are trying to find out how to make a real estate corporation in Ontario, you may find that how you file your provinical incorporation papers may differ from other provinces. Consult a corporate business lawyer first to ensure you are on the right track.