Under the new regulation announced on October 1, 2020, real estate agents are now allowed to incorporate and operate through a Personal Real Estate Corporation (“PREC”). Real estate agents now join several other professionals like doctors, lawyers and architects who are able to earn income through professional corporations. This new Ontario regulation specifies the criteria that defines a PREC; expands and clarifies the terms of advertisement; and amends certain requirements related to remuneration.
What is the criteria to operate through a PREC?
All equity shares (i.e. voting shares) of the corporation must be owned by the controlling shareholder (the real estate agent) who should also be the sole director and sole officer of the corporation. It is worth noting that equity shares are restricted to the controlling shareholder but non equity shares (i.e. non-voting shares) can be owned by the controlling shareholder’s family.
Further, PRECs are required to be registered under the Real Estate and Business Brokers Act (“REBBA”) or must qualify for exemption from registration. One example of an exemption is when the PREC itself does not carry on the business of trading in real estate other than providing services of its controlling shareholder to a brokerage.
Another condition is that there should be a written agreement between the PREC, the controlling shareholder and the brokerage governing their relationship. Under this agreement each party agrees not to obstruct the other party in the performance of their duties as prescribed under REBBA and its regulations.
What are the benefits of incorporating as a real estate professional?
Incorporating and operating through a PREC offers various advantages including tax deferrals, a lower corporate tax rate, income splitting and the benefit of limited liability (for non-realtor related services).
It is possible that realtors may have higher income one year and less income in the next. Incorporating gives realtors the opportunity to retain income in the PREC during the high-income years and pay out to the realtor over the following low-income years, allowing the realtor to fall under a lower tax bracket. Therefore, the realtor can defer payment of taxes until the money is withdrawn by the agent from the PREC.
Lower Corporate Tax Rate
Income earned through corporations is taxed at a lower rate than personal income. In Ontario, the marginal federal and provincial tax rate on personal income in excess of $220,000 is approximately 53% for 2020. However, earning income through a PREC allows the corporation to pay tax at a lower combined corporate tax rate of 12.2% on income up to $500,000. This means that a benefit of incorporating for agents is access to this lower tax rate.
Income splitting allows the real estate agent to split income with a low earning family member, knocking them into a lower tax bracket. It is possible to transfer income between family members through dividends or salaries/wages. If a business is incorporated, making your family shareholders and transferring income as dividends might be the best way of transferring income. These shares can also be structed to have no voting rights, thus allowing business owners to transfer income to their children.
Note however the new rules around the Tax on Split Income (TOSI) have made it more difficult for corporations to engage in income splitting. Previously, family members under the age of 18 were subjected to the highest marginal tax rate on split income which has now been expanded to also cover members over the age of 18.This effectively nullifies the tax advantage in many cases. However, there are a few exceptions around TOSI. For example, any income earned by a family member by working for at least 20 hours a week can be excluded from TOSI.
Just like any other professional corporation, PREC’s enjoy the benefit of limited liability in matters of non-realtor service issues. This prevents individuals from being personally liable for their company’s debts or financial losses. However, real estate agents remain liable for all real estate related professional and ethical obligations. Just because the real estate agent is providing services through a PREC does not mean they are absolved of professional obligations.
Additional considerations for real estate professionals
The new regulation expands on the terms used in advertising to better reflect current industry practice and consumer perceptions. The advertising terms permitted now include “real estate agent” and “broker real estate agent”. The new regulation also allows remuneration to a PREC that is exempted from registration under REBBA provided the brokerage provides in writing that all the conditions exempting the PREC from registration have been met.
It is worth noting that one registrant may be paid remuneration through a given PREC. All remuneration for team members must flow from the brokerage to each of the individual brokers and salespersons or to their respective PRECs. This opportunity for Ontario real estate agents to incorporate as a Personal Real Estate Corporation or PREC, has made it easier for agents to structure their business and maximize their income. In order to take advantage of the benefits described above, however, it is important to plan strategically and in advance. Contact a lawyer at Emerge to help you maximize your benefits from incorporating! contact us to book an appointment.
A special thank you to Spandana Unnava for her help and contributions to this article!
The content of this article is written for general information purposes only and does not constitute specific legal advice. This article should not be used as a substitute for competent legal advice from a licensed lawyer. Please contact us at 416-238-5527 if you’d like to speak to an Emerge LLP lawyer.