When you earn less income, you wish that you made more. When you earn more, you wish that you can keep more. Ontario, Canada is hands down one of the best places to live and raise a family but it’s also home to one of the highest marginal income tax rates in the world. The ability of Ontario real estate salespeople and brokers to form Personal Real Estate Corporation (PREC) under the Trust in Real Estate Services Act, 2020 (“TRESA”), as of October 1, 2020, may help those that earn more save some tax.
The Main Benefit is Tax Deferral
Prior to October 1, 2020, a real estate salesperson’s or broker’s earned commission fell under personal self-employment income. Which means that after deducting operating expenses and RRSP, the remaining amount is taxed at your personal tax rate. If you are a high earner, you are paying the highest personal tax rate in Ontario which is 53.53 percent on income over $220,000. In contrast, the combined federal and Ontario corporate tax rate is 12.2 percent on the first $500,000 of active business income.
The number of transactions and earned commission can greatly vary year to year for Realtors and without the ability to control and defer your personal taxable income, a realtor may earn $300,000 one year and $100,000 the following year, resulting on an average of $200,000 annual income but having to pay the marginal income tax of 53.53 percent in one of the two years. Compared to an employee with a consistent $200,000 annual income, the realtor would pay more aggregate income tax. By keeping the business earned income in the PREC, you have the flexibility to choose how much to pay yourself in a specific fiscal period in order to maximize your tax strategy.
To add another layer, the ability to be taxed at a lower corporate rate and control when to pay yourself salary allows for smart retirement planning. Consider you only require $90,000 gross income for your lifestyle but earn $200,000 after paying operating expenses. At that point, you can afford to pay yourself only $90,000 and let the remaining business income (post corporate tax) accumulate within the corporation until you are ready to pay yourself during your lower earning retirement years. This strategy could result in significant tax savings.
Each professional should discuss their specific and unique circumstances with their tax advisor to see if the potential tax savings are higher than the initial and ongoing legal and accounting costs of setting up and maintaining a corporation.
No Escape from Professional Liability
It is important to note that PREC does not provide additional protection from personal liability. As a real estate professional, you will remain personally liable for the services you provide and will be held accountable by RECO for breaches of TRESA and misconduct. As a result, escaping or limiting liability should not be one of the considerations to decide whether you should form a PREC. Your professional obligations and responsibilities remain the same.
One and Only One Realtor as Controlling Individual
Restrictions apply to who can be the controlling individual of a PREC. The only person who has any control over a PREC must be a licensed real estate salesperson or broker.
What does controlling individual mean?
- The owner of all the voting shares of PREC
- The only director of the PREC
- The only officer of the PREC
It is important to note that PRECs allow for only one controlling real estate professional. PREC is not a brokerage and thus not allowed to carry on the business of trading in real estate other than providing the services of its controlling shareholder to the brokerage that employs that individual.
There is potential for splitting business income with family members (18 years of age or older) who are actively involved in the business. A spouse, child or parent to a controlling real estate professional is allowed to hold non-voting shares of the PREC. It is important to speak with your tax and legal advisors prior to paying dividends to family members as tax on split income (TOSI), which is subject to the highest marginal tax rate, may apply.
Advertising under the PREC name is strictly prohibited
Although the Real Estate and Business Brokers Act (REBBA) does not impose requirements on the name of a PREC, please note that a PREC cannot be promoted or advertised as being able to provide real estate trading services. As a result, the PREC name is not for publicity or branding. You must only advertise and name the brokerage that provides remuneration to you and your PREC.
PREC Checklist by Real Estate Council of Ontario
Criteria – Corporate Attributes
- Must be incorporated under the Ontario Business Corporations Act
- The corporation has one single controlling shareholder (a broker or salesperson who owns ALL the equity shares, which are the voting shares)
- The controlling shareholder is the president and sole director and officer of the corporation
- The controlling shareholder is registered as a broker or salesperson
- Any non-equity shares (non-voting) must be owned directly or indirectly by the family members (spouse, children, parents, trust for minor child) of the controlling shareholder or by the controlling shareholder
- There is no written agreement or other arrangement that restricts or transfers the powers of the sole director and officer to manage or supervise the management of the business and affairs of the corporation
PREC Conditions
- The PREC does not carry on the business of trading in real estate other than providing the services of its controlling shareholder to the brokerage that employs that individual
- The controlling shareholder is employed by a brokerage to trade in real estate
- The PREC, its controlling shareholder and others are prohibited from representing to the public that the PREC trades in real estate
- The PREC does not carry on business as a brokerage
- The PREC only receives remuneration for trading in real estate from the brokerage employing the controlling individual and the controlling individual only receives remuneration for trading in real estate from the PREC or their employing brokerage
- The PREC does not, on behalf of the brokerage, directly or indirectly hold any money or other property of a person in connection with trading in real estate
Agreement – Brokerage, PREC and Controlling Shareholder
There must be a written agreement between the PREC, the controlling shareholder and the brokerage governing the relationship between the brokerage and the corporation and its controlling shareholder.
Under the agreement, the PREC agrees:
- Not to hinder or obstruct the brokerage or its broker of record in their performance of duties under the legislation
- Not to hinder or obstruct the controlling shareholder in the performance of the controlling shareholder’s duties under the legislation
- To provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of record to comply with their duties under the legislation and to enable the brokerage and its broker of record to ensure that the controlling shareholder is complying with the controlling shareholder’s duties under the legislation
- To provide whatever assistance may be reasonably necessary to enable the brokerage
to determine whether the conditions are met
Brokerage Obligations
- Before any remuneration is paid to the PREC, the brokerage must satisfy itself that the corporation meets the requirements to be a PREC
- The registrant must enter into an agreement with the PREC and the brokerage regarding the use of the PREC and payment of remuneration to the PREC
Registrant (Controlling Shareholder) Obligations
- The registrant must be employed by the brokerage
- In establishing the PREC, the registrant must ensure that the criteria and conditions identified are met
- The registrant must enter into an agreement with the PREC and the brokerage regarding the use of the PREC and payment of remuneration to the PREC
- The registrant must notify the registrar (RECO) of the legal name of the PREC and the address for service of the PREC before the PREC receives any remuneration from a brokerage
- The PREC cannot pay the registrant an amount for remuneration that is greater than the amount of the remuneration received from the brokerage
- The registrant must notify the registrar (RECO) in writing of any change in circumstances that would affect the PREC’s eligibility for the exemption from registration or any change to the information provided to the registrar (RECO) about the PREC, within five days after the change takes place
- The registrant must ensure that the PREC does not engage in any activity that would otherwise require registration
Speak with your lawyer and accountant to see if forming a Professional Real Estate Corporation (PREC) is right for you.
