Personal Real Estate Corporations Offer Significant Tax Savings

As of November 2020, Ontario realtors can now take advantage of tax savings and other income preservation tools offered through incorporation. Pursuant to the Trust in Real Estate Services Act, 2020, realtors and brokers can now incorporate their business through a Personal Real Estate Corporation (PREC). This allows them to manage income through the corporation and make use of various tax-saving strategies previously unavailable to them as a self-employed individual.

What are the requirements to incorporate a PREC in Ontario?

A PREC must be carefully structured in order to meet the legal requirements set out in the legislation and to avoid compliance issues when it comes to tax filing. Specifically, a PREC must meet the following criteria:

  1. The sole voting shareholder must be the agent or broker.
  2. The agent or broker may not enter into any agreement or other arrangement in which they transfer or delegate their management of the PREC to another person.
  3. The PREC must be incorporated under Ontario’s Business Corporations Act.
  4. The PREC may appoint non-voting shareholders, however only to the agent or broker’s family members (or a representative trust in the case of family members under the age of 18).

Incorporation also means paying additional costs that come with incorporation, including registration and administrative fees. Further, a person who incorporates a PREC will likely want to hire a bookkeeper or accountant to ensure they remain compliant with all requirements imposed by the Canada Revenue Agency.

A corporation also means additional administrative responsibilities. Any corporation registered in Ontario is required to establish certain documents, including:

  • Articles of amendment
  • By-laws
  • A shareholder’s agreement (in cases where there are more than one)
  • An ongoing record of meeting minutes

An experienced corporate lawyer will be able to assist the shareholder(s) of a new PREC with the preparation and ongoing maintenance of these records to ensure compliance with all provincial laws.

What are the benefits of a PREC?

The primary reason most people would opt to incorporate a PREC is to save on income tax. In Canada, the tax rates for a corporation are significantly lower than for an individual earning over a certain amount. For example, an individual is taxed at a rate of over 53% for income earned over $220,000. In contrast, the corporate tax rate is just 12.5% on the first $500,000. If you regularly earn over $220,000 annually, registering a PREC could result in considerable savings each year.

A PREC also allows realtors and brokers to have better control over the management of their business income. For example, by creating a PREC, the realtor or broker can opt to leave a percentage of their business income in the corporation, therefore deferring tax on that income at the personal rate. It may be advisable to do so in years when business has been especially good, deferring the personal taxation on a portion of one’s income until a year with less income overall.

Further, a PREC allows the realtor or broker to split income among other members of their family by naming them as non-voting shareholders of the PREC. Canada’s tiered personal tax rate system means that a broader distribution of the income among multiple people will result in taxation at a lower rate than if one person had claimed all of the income themselves.

Contact Prudent Law in Mississauga for Trusted Guidance Through the Process of Incorporating a Personal Real Estate Corporation

The lawyers at Prudent Law in downtown Mississauga and Milton are adept at working with businesses of all sizes and types of business management and strategy. Through our ongoing real estate practice, we have developed relationships with a number of agents in the area and are attuned to their needs. We will work with you to advise on whether incorporating a PREC is right for you, and provide insight and advice throughout the process. To discuss your business and corporate needs with one of our experienced business and real estate team, please call us at 905-361-9789 or contact us online.

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