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A personal real estate corporation, or PREC, allows a real estate agent to earn their business income through a corporation. Several o provinces, including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia and, most recently, Ontario, allow PRECs.
Several other professionals in Ontario, like doctors, dentists, lawyers, accountants, social workers, engineers and architects, can also establish professional corporations.
A PREC should not be confused with a corporation set up by a real estate investor to own real estate. A personal real estate corporation is only for a real estate agent.
Real estate investors may not benefit from setting up a corporation to hold their real estate investments. An example of when incorporation makes sense is if someone has an existing corporation with accumulated savings they want to invest in real estate. Or an investor who wants to buy and sell real estate—flipping properties—may benefit from a lower tax rate on this corporate business income. Some other scenarios may include investing in commercial real estate or establishing a not-for-profit corporation as part of a family cottage succession plan. I have written recently about whether you should buy real estate through a corporation.
Tax deferral, not tax savings
Getting back to PRECs, whether a realtor should incorporate depends on their circumstances.
One of the primary benefits to incorporation for a realtor, or anyone else, is the ability to defer income tax. The tax rate on small business income up to $500,000 in Ontario is 12.2%, and comparable in other provinces. Profit left in a PREC generally qualifies for this low rate of tax. By comparison, personally earned income at $50,000 in Ontario is taxed at 29.65%; at $100,000, it’s 43.41%; $150,000 at 44.97%; $200,000 at 48.19%; and over $220,000 at 53.53%.
So, for a high-income Ontario realtor, incorporation could result in tax deferral of up to 41.33%, based on the top personal rate of 53.53% less the corporate small business rate of 12.2%. Note that I use the term tax deferral, not savings, as eventually personal tax becomes payable to withdraw accumulated corporate savings. After-tax profits in a corporation can be paid out as a dividend at rates ranging from 0% up to 47.74%, depending on the recipient’s other income for the year.
Income splitting with family members
Ontario realtors can name family members as shareholders of their PREC as well, but the realtor must own all voting shares of the company. Non-voting shares can be issued to others, and dividends can be paid to them. However, under Tax on Split Income (TOSI) rules that have applied to all Canadian private corporations since 2018, most dividends paid to family members will be considered split income and taxable at the top tax rate, negating the income-splitting benefits.
