New rules allow for brokerages to pay funds owed for trading in real estate to a corporation.
On October 1, 2020, the Ontario Government announced a radical change related to the Real Estate and Business Brokers Act, 2002, through the Trust in Real Estate Services Act, 2020, (TRESA), which is designed to update real estate legislation to reflect today’s real estate market. The new measures include changes that align real estate brokerages and professionals more closely with modern business practices, including allowing real estate professionals to incorporate and be paid through Personal Real Estate Corporations (PRECs). The PREC allows real estate agents to operate in a similar fashion to dentists, lawyers and doctors who can take advantage of numerous tax planning opportunities, flexibility in income, and tax effective investments. This article provides a brief overview of how a PREC must be set up, along with the advantages and disadvantages of incorporating, which may change based on individual circumstances. If you are interested in discussing the merits and considerations of a PREC and how to maximize the benefits thereof given your specific circumstances, please contact us for expert advice and guidance.
A PREC has specific activities and restrictions that must be followed including:
- A single controlling individual must own all the equity shares and must be the sole director and officer of the corporation
- The controlling individual must be a registered real estate broker or agent
- The family members of the controlling individual may hold non-equity shares
- The PREC itself cannot buy or sell property
Benefits of a PREC include:
- Taxation
- Lower corporate income tax rates provide significant tax deferral and savings opportunities (ie: 12.5% corporate tax on the PREC’s first $500,000 of taxable income and 26.5% thereafter in Ontario). In contrast, the top personal marginal income tax rate in Ontario is 53%.
- The above concept is central in the development of numerous additional tax planning solutions pre and post PREC formation which can serve as a significant wealth preservation tool for realtors.
- Possible legal liability protection; however, this issue should be reviewed with a qualified lawyer.
Considerations of a PREC may include:
- Incorporation fees
- Maintaining more comprehensive accounting books and records in addition to corporate minute books, corporate bank accounts, corporate credit cards and other corporate compliance issues.
Obtaining professional advice based on your particular facts and circumstances is important to ensure that your PREC has been optimized. Please contact your Bateman MacKay Business Advisor with any questions you may have.
