Understanding Personal Real Estate Corporation (PREC)

A Personal Real Estate Corporation (PREC) is a corporation exclusively owned by a single real estate salesperson, associate broker, or managing broker. It provides the opportunity to leverage the financial and tax planning benefits of a corporation. However, personal real estate corporations are strictly limited to activities related to real estate or auxiliary services.

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To establish a PREC, the licensed real estate salesperson must be the only voting shareholder, director, and officer of the corporation. This ensures that the corporation remains closely held and tightly controlled by the licensed individual.

Here are some advantages:

By setting up a Personal Real Estate Corporation (PREC), you can plan and defer your taxes, which is one of its most significant advantages.

Without a PREC, you’ll be taxed based on personal income tax rates, which are typically a combination of federal and provincial rates. These rates can be quite high, especially if you fall into the higher tax brackets. For instance, in Ontario, individuals who earn $300,000 per year would pay an average tax rate of 42% and a marginal rate of 54%.

With a PREC, however, your real estate service revenue will be taxed at a lower rate. The corporate tax rate is considerably lower, and in Ontario, you’d pay a small business corporate tax of 12.2% on the first $500K of income earned by your PREC. After paying corporate taxes, you can decide how much money you’d like to receive from the business, either in the form of a salary or dividends, which will be taxed at your income or dividend tax rate, respectively. You can choose to pay yourself when you anticipate making less money in the future, such as during retirement or a hiatus, thereby reducing your overall tax burden.

Also Read: Understanding Taxes: A Comprehensive Guide

As a real estate agent, if you do not have a Personal Real Estate Corporation (PREC), you would have to pay into the Canada Pension Plan (CPP) as an employee. This could take up a significant portion of your income, with around 10% going towards CPP contributions for an income of $60,000. However, with a PREC, you have the flexibility to choose between receiving a salary or dividends. By paying yourself dividends, you can avoid paying CPP contributions, freeing up more money to invest and save for your retirement.

In a Personal Real Estate Corporation, the real estate agent is the sole shareholder with voting shares. However, family members can hold non-voting shares in the company. To take advantage of income splitting, a family member who is actively involved in the business may be paid a dividend. The Tax on Split Income (TOSI) tax, which was introduced in 2018, imposes a high tax rate on dividends paid to family members.

Nevertheless, a family member who is actively involved in the business is exempt from TOSI. For instance, if a family member over 18 works more than 20 hours a week in the PREC, they may be eligible for a dividend that will be taxable at their rate, not the highest marginal rate. Additionally, a family member can qualify as being actively involved in the business if they have worked at least 20 hours a week for five years.

Starting October 1, 2020, you can establish your own business as a Personal Real Estate Corporation (PREC) in Ontario by registering with the Real Estate Council of Ontario and obtaining approval for your PREC’s name and address. PRECs must have a business address in Ontario to operate in the province. Additionally, you must file your Articles of Incorporation to complete the process.

The Ontario Real Estate Association (OREA) provides a variety of resources for real estate professionals seeking to establish a PREC, such as guides, PowerPoint presentations, videos, and more.

Since PRECs are not considered businesses under Ontario’s Real Estate and Business Brokers Act, they are not required to have a name. In a PREC, only one individual can own equity shares (voting shares), and if you establish a PREC with your spouse or another person, they cannot own equity shares or be compensated by the PREC.

Also Read: Everything about making taxes easier

If you want to set up a personal real estate corporation (PREC) in Quebec, you will need to follow these steps:

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