Historically, real estate agents and brokers we unable to operate their businesses through a corporation. Effective, October 1, 2020, this has changed; The Trust in Real Estate Services Act (known as Bill 145) was put into force. The legislation allows agents and brokers to operate their business through a corporation known as a PREC. A PREC a Personal Real Estate Corporation and is a separate legal entity with special restrictions and shareholder requirements designed for the real estate industry.
Professional Real Estate Corporation Requirements
There are several specific requirements instituted for a PREC. These include:
- The Business Corporation Act applies to all newly formed PRECs.
- The Controlling shareholder must own (directly or indirectly) all the equity shares.
- The Controlling shareholder must also be the sole director and president of the corporation.
- Non-equity shareholders may include the controlling shareholder, a family member of the controlling shareholder, or be in trust for minor children of the controlling shareholder.
- There is no agreement, written or other, that limits or assigns, in part or wholly, the power of the director to control the business and the corporate affairs.
A PREC allows for better options for tax planning and tax deferrals. Prior to this change, real estate professionals were required to report income on a personal income tax return as a sole proprietor.
Benefits of a PREC
A PREC allows you:
- To ‘leave’ income in the corporation. For example, if you had a net income (after allowable deductions) of $200,000 in the past, you were forced to report that entire amount as income on your personal tax return. With a PREC, you can ‘leave’ up to $500,000 in the corporation and pay a lower corporate tax on it. You are only required to pay higher personal tax on the amounts you take or withdraw from the corporation.
- The opportunity to split income with your spouse. However, there are regulations (TOSI) that need to be followed. These regulations require, among other things, that your spouse to be actively working in the corporation and be paid a reasonable wage.
- The freedom to defer personal income within the corporation until a lean year, when you can withdraw it and potentially pay less tax.
A PREC does not:
- Give you any overwhelming advantage over those who don’t incorporate.
- Mean you will automatically pay less tax.
- Allow you to deduct any more or any new expenses than previously allowed.
- Hold advantages for lower income agents who require all the earnings for personal use.
A PREC could create additional management, reporting, and cost requirements for you. In addition to your existing personal tax preparation, you could be required to file and or pay for incorporation, preparation, filing, reporting, and return fees.
A PREC offers many tax deference and planning opportunities that require a thorough review and forward-thinking plan to maximize the potential benefits. Let MDP work with you through this intricate process and ensure you take all advantages available to you.