THINKING TO INCORPORATE?
Personal Real Estate Corporation (PREC)
- As of October 1, 2020, Real Estate salespersons can incorporate and receive commissions through a PREC owned by the salesperson.
- The PREC will still receive commissions from the brokerage and not directly from clients.
- The relationship between the PREC and the brokerage will not be substantively different than the relationship between a salesperson and a brokerage that exists today.
PREC’s – Active Business Income
- The real deferral benefit comes from a difference in taxation rates between the PREC and personal tax rates.
- Commissions will be considered ‘active business income’ under the Income Tax Act(subject to a $500k net income limit to benefit from the small business tax reduction). Active business income earned by a corporation is subject to a combined top federal and Ontario income tax rate of 12.2% (the combined GENERAL corporate tax rate is 26.5%) COMPARED to a combined top marginal personal income tax rate of 53.6%.
- The tax differential can be significant and as much as 41% – this is the main advantage. In other words, a tax deferral (huge difference between deferral and elimination) occurs at the top marginal bracket of as much as $41 for every $100 left in the PREC. This is a personal tax deferral and an excellent vehicle for retirement savings.
Every Person is Different!
Substantial pros and cons of Incorporation
- Tax deferral (in some ways analogous to an RRSP) especially for high earners;
- Opportunity to better save for retirement;
- Some opportunity to split income (WATCH OUT – TOSI!); and,
- Earn passive income.
- Significant bookkeeping;
- Incorporation costs and Annual Corporate tax return requirements;
- No deferral = no benefit = wasted money on professional fees;
- 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;
- 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;
- This language is very odd in the regulation because it is imperative that real estate agents maintain their status as independent contractors and NOT employees.
- The PREC, its controlling shareholder and others are prohibited from representing to the public that the PREC trades in real estate;
- This is an advertising issue. Your current advertising should not change.
- The PREC does not carry on business as a brokerage;
- Brokers who are also real estate agents need to be careful here.
- 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.
OREA has passed along this question to RECO for its more definitive guidance but has suggested to RECO that the PREC Regulations do not appear to prohibit a brokerage from paying compensation for pending transactions to the PREC of a Registrant and that the policy thrust of TRESA and the regulations is to ensure compliance at the time of the payment. We assume of course that the REALTOR® was a Registrant at all times. We will update this FAQ with a link to RECO’s guidance once that is published. However, just as important will be the specific provisions in the agreement between a PREC and the brokerage. That should explicitly address how these payments are to be handled. We expect that because most Registrants who opt to take advantage of the PREC regime will already be Registrants with a steady income stream, that this will be addressed in almost all PREC agreements. Advice from a lawyer when entering into the agreement with your Brokerage, particularly if you have this particular concern, is recommended.
This is a real concern. Talk to a tax professional. There are corporate law, contract law and tax law issues. Consult an advisor.
For more information please contact Jerzy Wojcicki at firstname.lastname@example.org