On October 1, 2020, the Government of Ontario filed Ontario Regulation 536/20, Personal Real Estate Corporations (“Regulation 536/20”), under the Real Estate and Business Brokers Act, 2002, SO 2002, c 30, Schedule C (“REBBA 2002”). Regulation 536/20 allows realtors in Ontario to incorporate Personal Real Estate Corporations (“PRECs”) and establishes the regulatory framework with respect thereto. Realtors now join other professionals, such as medical doctors, lawyers and accountants, who are permitted to earn income through a professional corporation. This post provides an overview of Regulation 536/20 and addresses some of the potential benefits of a PREC to a realtor.
Regulation of PRECs
Pursuant to Regulation 536/20, a PREC must be incorporated under the Ontario Business Corporations Act, RSO 1990, c B.16. The PREC’s sole director, sole officer and the controlling shareholder must be registered under REBBA 2002, or exempt from registration, and must be employed by a real estate brokerage to trade in real estate. The PREC itself cannot carry on the business of trading in real estate other than by providing the services of its controlling shareholder to the brokerage. The PREC is only permitted to receive remuneration pertaining to trading in real estate from the controlling shareholder’s brokerage. Likewise, the controlling shareholder is only permitted to receive remuneration pertaining to trading in real estate from the PREC or from the brokerage by which the controlling shareholder is employed.
Benefits of PRECs
If used correctly, a PREC can assist a realtor with tax planning. Instead of all annual income being taxed at the realtor’s personal marginal income tax rate, income retained in a PREC will initially only be taxed at a corporate tax rate. Presently, the combined federal and Ontario personal income tax rate is over 53% on income over $220,000 whereas for Canadian controlled private corporations entitled to take advantage of the small business tax deduction, the current combined federal and Ontario tax rate is only 12.2% on income up to $500,000. Thus there is the potential for considerable deferment of taxes.
Retaining earnings in a PREC may allow for personal income to be “averaged” over several years. The real estate industry can be volatile and realtors are usually only paid on commission. As such, a realtor may have a sizeable income one year and less income in the following years. If one year results in particularly high earnings, those earnings can be retained in the PREC and paid out to the realtor over the following years, rather than being paid to the realtor by the brokerage in the year in which they were earned. This may result in the earnings being taxed at lower marginal income tax rates over several years. The realtor also has the option of being paid by the PREC through dividends rather than through wages, which may provide additional tax advantages.
The PREC also allows real estate agents the ability to income-split with the realtor’s spouse, child or parent, subject to the more comprehensive rules regarding tax on split income (which are relaxed for persons over age 65). Therefore, it may be possible to pay amounts from the PREC to those family members, who will presumably be taxed at a lower marginal tax rate than the realtor.
Is a PREC Right for You?
In order to take advantage of the benefits that a PREC can offer, proper planning is essential. A realtor must consider the extra administrative costs associated with incorporating and maintaining a corporation and weigh these costs against the potential benefits of a PREC.
To further discuss whether or not a PREC is appropriate for your situation or to learn more about incorporating a PREC, please contact Elisabeth Colson, a partner and the head of Devry Smith Frank, LLP’s Corporate Commercial Group, at 416-446-5048 or at email@example.com.
“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”