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.
Originally published by Devry Smith Frank, October
2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
