Personal Real Estate Corporation (PREC)
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What is a Personal Real Estate Corporation?
A Personal Real Estate Corporation (PREC) is a corporation belonging to a single real estate salesperson, associate broker, or managing broker for the purpose of benefiting from the income and tax planning potential of a corporation. Personal real estate corporations may only provide real estate or ancillary services (real estate transaction-related services) as their main form of business. The real estate salesperson owning the PREC license must be the sole voting shareholder, as well as the sole director/officer of their personal real estate corporation.
What can you do with a Personal Real Estate Corporation?
You can take advantage of certain benefits including:
- Tax deferral for life and retirement planning purposes
- Reduction/elimination of Canada Pension Plan (CPP) contributions
- Income splitting with family members under certain circumstances to reduce family tax
The most important benefit of establishing a Personal Real Estate Corporation is tax deferral and tax planning.
Without a PREC, you would normally be taxed at the personal income tax rate (combined federal and provincial rates), which can be quite high if you are earning at one of the higher tax brackets. For example, if you are earning $300K in Ontario, then you would pay income tax at an average rate of 42% and a marginal tax rate of 54%.
With a PREC, real estate service revenue will be taxed at the corporate tax rate, which is a significantly lower rate. For instance, up to the first $500K in income in your PREC, you will pay 12.2% in Small Business Corporate Tax in Ontario and 13.5% in BC. The monies you earn after deducting corporate taxes will be held in the business, and can be paid out to yourself in the form of salary or dividends, which will then be taxed at the personal income tax rate or dividend tax rate, respectively. If you are currently in a higher income tax bracket, you can choose to pay yourself in the future when you expect to be earning less income, such as when you are retired or taking time off, in order to save on the total amount of taxes you pay.
Reduction/Elimination of CPP Expenses
If you are a real estate agent without a PREC, you are earning a salary and you are required to make contributions to the Canada Pension Plan (CPP) which often constitutes a significant portion of your income (approximately 10% for an income of $60,000). With a PREC, you are able to choose if you will eventually pay your earnings to yourself in the form of a salary or in the form of dividends. If you pay yourself dividends, then you do not need to make CPP contributions on the dividends and you will be able to invest and save up for your retirement on your own with the funds.
Income Splitting with Family Members
In certain circumstances
Although the real estate agent must be the only shareholder with voting shares, family members are allowed to own non-voting shares in the Personal Real Estate Corporation. In 2018, the Tax on Split Income (TOSI) came into effect, which requires dividends paid to family members to be taxed at the highest marginal tax rate. However, there are many exceptions to TOSI; the most common one being that a family member who is actively involved in the business is exempt from TOSI. This means that if a family member over the age of 18 works for 20+ hours per week in the PREC, they may be paid dividends that will be taxed regularly at their respective dividend tax rate (instead of TOSI’s highest marginal tax rate). Individuals can also be considered to be actively involved in the business if they have worked at least an average of 20 hours per week for five years. These five years do not need to be consecutive.
Limitations and Disadvantages of a Personal Real Estate Corporation
Before applying for a Personal Real Estate Corporation license, there are several considerations you should make regarding the limitations and disadvantages of PRECs, and if the benefits outweigh the disadvantages for your unique business circumstances.
The major limitations and disadvantages of personal real estate corporations include:
- Limited Allowable Activities: A PREC is restricted to providing real estate and ancillary (related) services as the primary source of income. For example, a PREC cannot trade in stocks or bonds as their primary source of income, hold real estate assets beyond what is reasonably necessary to provide real estate services to clients, nor can PRECs engage in real estate development activities. Restrictions can vary by province. For example, Ontario does not have any restrictions on real estate holdings, and beyond restrictions on trading of real estate, there are no restrictions on a PREC’s source of income.
- Incorporation Costs: Legal and lawyer fees to incorporate a PREC are typically around $1000-$2500.
- Accounting Costs: Corporate entities need to file a T2 Corporation Income Tax Return. If the PREC is also paying salaries to employee(s), then the company has to issue T4s at the end of the year as well. Usually you would need to hire a professional accountant to prepare the financial statements of the company and the respective tax returns.
- PREC Licensing: You are required to apply for a PREC license as well as maintain your own real estate services license. As you will have two licenses, the licensing fee will cost twice as much. For example, if you are located in British Columbia, your licensing fees will total to $2,900 every two years instead of $1,450. In Alberta, it would cost you $1,300 a year instead of $650. Please note that your PREC license must be licensed at the same level as your personal real estate license, and you will only be able to provide the same level of real estate services as permitted by your personal license.
- Naming/Advertising: There are strict limitations on how you can name and advertise your PREC. The name of your Personal Real Estate Corporation must be registered as either your Legal Name, followed by “Personal Real Estate Corporation”, or your Licensee Name, followed by “Personal Real Estate Corporation”. For example, if John Doe started his own PREC, then it must be named “John Doe Personal Real Estate Corporation”. All forms of advertising for your PREC must use the registered name for your PREC, including advertising on websites, business cards, for sale signs, and more. These naming requirements vary by province. For example, Ontario has no naming requirements.
How to Register for a Personal Real Estate Corporation (PREC)
How to Register for a Personal Real Estate Corporation in Ontario
As of October 1, 2020, real estate agents in Ontario are allowed to form Personal Real Estate Corporations. To register for a PREC in Ontario, you must give notice to the RECO (Real Estate Council of Ontario) and have your PREC's name and address approved. PRECs in Ontario are required to have a business head office address in Ontario. In addition, you must file your Articles of Incorporation.
The Ontario Real Estate Association (OREA) has a list of PREC resourcesavailable to real estate professionals looking to start their own Personal Real Estate Corporation on their website, including guides, powerpoint presentations, and videos.
Ontario's Real Estate and Business Brokers Act does not have any naming requirements for PRECs as they are not considered personal professional corporations. There can only be one equity owner in a PREC. A spouse or other individuals cannot hold any equity shares (voting shares), and members under a PREC cannot be paid directly by the PREC.
How to Register for a Personal Real Estate Corporation in BC
The steps to register for a Personal Real Estate Corporation in British Columbia are as follows:
- Choose an appropriate name for your PREC and ask your lawyer to reserve this business name in the Corporate Registry.
- Work with your lawyer to incorporate your business under the chosen name.
- Apply for a license for your Personal Real Estate Corporation with the Real Estate Council of British Columbia (RECBC) through completing the RECBC Application for Personal Real Estate Corporation form and paying the fees as indicated on the form.
- Register for a GST number for your PREC.
- Register for workplace insurance with WorkSafeBC.
Real estate licenses are valid for two year periods in British Columbia. When registering a Personal Real Estate Corporation for the first time, an one-time fee will be charged. This fee is prorated for the months until the expiry date of your individual license, and is charged to the nearest month. For example, if you are one year into your two-year licensing period, a one-time fee equivalent to one year’s worth of licensing fees will be charged. The expiry date of your PREC’s license must be the same as the expiry date of your individual license.
How to Register for a Personal Real Estate Corporation in Alberta
The steps to incorporate a Personal Real Estate Corporation in Alberta are as follows:
- Select an appropriate name for your business.
- Get an Alberta NUANS report: this checks to ensure that there is no other corporation with the same name you intend to use for your business.
- Complete your Articles of Incorporation.
- Select a head office location for your business (the address must be in Alberta), and complete the Notice of Address.
- Complete the Notice of Directors (you should be the sole director of your PREC).
- Submit the application package containing all the forms you have filled out, along with fee payment and a valid ID.
How to Register for a Personal Real Estate Corporation in Saskatchewan
The steps to register a Professional Corporation (PC) in Saskatchewan are as follows:
- Select an appropriate name for your business. In Saskatchewan, the possible names for your PC are different from the other provinces and include [Real Estate Agent’s Full Name], followed by “Real Estate Professional Corporation”, “Real Estate Prof. Corp.”, or “Real Estate P.C.”.
- Contact the Information Services Corporation (ISC) for a title search to ensure that no other registered business uses the same business name.
- After the selected name for your business is approved, you can submit required documentation to ISC for registration of your business. If this is approved, you will be issued a Certificate of Incorporation.
- Apply to the Saskatchewan Real Estate Commission for a Permit for your PC using the forms available on their website. After this is approved, you will be issued an annual permit valid from January 1 to December 31.
How to Register for a Personal Real Estate Corporation in Manitoba
The steps to incorporate a Personal Real Estate Corporation in Manitoba include:
- Selecting a suitable name for your PREC business. If operating in multiple provinces, consider incorporating at the federal level as well as the provincial level. You can conduct a preliminary search in the Entrepreneurship Manitoba Business Library to see if a prospective name for your business is already taken.
- Fill out a Request for Name Reservation with the Companies Office of the Government of Manitoba.
- Fill out your Articles of Incorporation and submit them to the Companies Office as well.
How to Register for a Personal Real Estate Corporation in Quebec
The steps to incorporate a Personal Real Estate Corporation in Quebec include:
- Select an appropriate name for your PREC business. In Quebec, you must have a French name for your business, as well as follow some other rules for naming your business, which can be found in the Quebec Enterprise Register.
- Use the search tool in the Enterprise Register to ensure that the prospective name for your PREC is not already taken.
- Select a location for your head office in the province of Quebec.
- File the Articles of Incorporation and the Initial Declaration with the Quebec Enterprise Register.
- Pay the fees for your Initial Declaration as stated on the Registrar’s website. After the province processes your application, you will receive a Certificate of Incorporation as well as a Quebec Enterprise Number (NEQ).
How to Register for a Personal Real Estate Corporation in Nova Scotia
The steps to register for an Approved Sales Corporation License in Nova Scotia are as follows:
- Select an appropriate name for your Approve Sales Corporation. The Nova Scotia Real Estate Commission requires the name of your Approved Sales Corporation to be your first name and your last name followed by the word “Licensed”. If the name for your business is already taken, you may contact the Registrar for approval to add additional words.
- Send your business name to the Licensing Officer of the Nova Scotia Real Estate Commission to approve with the subject line “Approved Sales Corporation Name”.
- Check with the Nova Scotia Registry of Joint Stock Companies to ensure that the selected name of your business is available for use.
- File an application for incorporation with the Nova Scotia Registry of Joint Stock Companies.
- Apply for the Approved Sales Corporation License with a Memo of Association, Certificate of Incorporation, Certificate of Registration, and licensing fee.
PREC News and Regulations
On October 1, 2020, the Ontario government amended the Real Estate and Business Brokers Act, 2002 (REBBA) which now allows real estate agents to form Personal Real Estate Corporations in Ontario. The legislation allows brokerages to pay remuneration to an agent’s PREC for work completed instead of to the real estate agent themselves. The new legislation allows real estate agents in Ontario to access income tax planning and retirement planning benefits through their PREC. As the real estate industry is based on commission earnings which can be volatile, the ability to retain earnings in a corporation allows real estate agents to average out their income and save on tax across years where they earn a significant amount of income and years where they earn less.
The REBBA’s Code of Ethics has also been updated to allow brokers to use new terms when advertising:
- Real estate agent
- Broker real estate agent
Salespersons can also use the term “real estate agent” in their advertising.
"Remuneration" has also replaced "commission" in the Real Estate and Business Brokers Act, and can include commissions, fees, or rewards, that have been received or will be received. The term “commission” can still be used in advertising and in documents.
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