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Personal Real Estate Corporations (PRECs) in Ontario


INCORPORATING YOUR REAL ESTATE PRACTICE

Until recently, a real estate salesperson or broker in Ontario was not able to incorporate. As of October 1, 2020, this may no longer be the case. Realtors/real estate agents may be able to incorporate a PREC - Personal Real Estate Corporation.

Currently, there is a consultation period underway that is slated to conclude on September 8, 2020. The Government will then review the comments they receive and move forward with implementing the supporting regulations.

October 2020 Update: the regulation under the Trust in Real Estate Services Act, 2020 (“TRESA”) on personal real estate corporations (“PRECs”) came into force. This regulation will allow Ontario real estate salespeople and brokers to finally operate their business through Personal Real Estate Corporations (PRECs).

It is very important to note that one limitation of a PREC is that it must not trade in anything other than to provide the services of its shareholder (aka the realtor) to the brokerage.  That means that a PREC shouldn’t be earning income from other sources (i.e. rental properties, ecommerce sales, etc.).

SHOULD YOU INCORPORATE?

Just because you can doesn't mean you should. Like any other professional, the decision to incorporate will depend on your circumstances.

Generally speaking, if you have income in excess of your personal spending requirements then you should consider incorporating.

Remember, a corporation is a separate legal entity. The funds from commissions would be earned there. A tax plan has to be created for you, the individual realtor, to access those funds. If not done correctly, there could be significant tax implications.

Consider the following example related to commissions earned personally vs. a corporation.

The following calculations:

  1. Assume that ‘Jane’ is a resident of Ontario and only includes the basic personal tax credit

  2. Assume that the corporation is a resident of Ontario and qualifies for the small business tax rate.

Jane’s net income (income after expenses) from her real estate activities on a yearly basis is $500,000. If she does not incorporate, her personal tax would be approximately $229,225, leaving her with $270,775.  From the $270,775 remaining, $150,000 would go towards her personal expenditures (mortgage/rent payments, travel and other personal expenses) and the remaining $120,775 would be used for investing.

Alternatively, if Jane decided to incorporate, her corporation would earn the $500,000. The tax payable to the corporation on the $500,000 would be $66,000 (as opposed to the $229,225 above). Jane would pay herself a dividend from the corporation in the amount of $220,000, which would result in an approximate tax of $67,500 personally leaving her with $150,000 for her personal expenditures. In addition, the corporation would also have 214,000 to reinvest ($500,000 less $66,000 in taxes less $220,000 in dividends to Jane).

By leaving the excess income in the company, Jane has effectively deferred personal tax and availed herself to additional cash to reinvest. The illustration below summarizes this example: