On October 1, 2020, the Government of Ontario announced a change under the Trust in Real Estate Services Act, 2020 that will allow real estate agents (“Agents”) to incorporate and be paid through a Personal Real Estate Corporation (“PREC”).
Below is a brief summary of some of the key details that Agents should be aware of with respect to incorporating and operating a PREC.
What are the rules for structuring and operating a PREC?
In order to incorporate and operate as a PREC, there are some specific rules regarding ownership, which include the following:
- The “controlling shareholder” must own all of the equity shares of the corporation and that controlling shareholder must be the sole director and officer;
- The controlling shareholder must be a registered real estate agent or broker;
- The family members of the controlling shareholder may hold non-equity shares (i.e. preference shares); and
- The PREC cannot buy or sell real estate.
There are many tax benefits that a PREC can offer including tax minimization and tax deferral. If an Agent earns more income than he or she spends in a given year, then earning the income through a corporation offers a highly effective way to minimizing annual taxes by taking advantage of the low corporate tax rate in Ontario.
The current corporate income tax rate for a small business in Ontario is 12.2% on the first $500,000 of taxable income and 26.5% for taxable income in excess of $500,000. Below is an analysis of the approximate annual tax savings if income is earned and retained in a corporation in comparison to earning the same income personally:
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As shown above, earning real estate commissions through a PREC can provide a significant opportunity to defer income taxes. This can allow the Agent to reinvest the savings back into their business or invest the cash into income producing assets. The use of a PREC can also potentially provide further savings by allowing one to “smooth” personal income over multiple years thereby reducing personal income tax.
If you think a PREC may be right for you, take caution before deciding to incorporate. If an Agent incorporates, the Canada Revenue Agency may consider the Agent to have sold his or her “business” or “goodwill” to the PREC for fair market value – this in turn may give rise to capital gains tax for the Agent. We recommend you speak with your tax advisor before incorporating to ensure the any such tax consequences can be avoided on incorporation.