Lawyers play an important role in many things, but did you know real estate was one of them? Lawyers like Minhas Lawyer Services handle many situations, including helping real estate brokers and agents in Ontario to form a PREC.
What is a PREC for Real Estate Agents, Salespersons, and Brokers in Ontario?
A PREC or Personal Real Estate Corporation is created by real estate agents or brokers and is a personal corporation. It allows Ontario Realtors to earn his or her income through a corporation. It is relatively new, legislation was begun on October 1, 2020.
Realtor as a Sole Proprietor may not take advantage of Income Tax Deferral, Income Smoothing, and Income Splitting or sharing with other family members. However, under PREC, Real Estate Salespersons and Brokers in Ontario can take advantage of corporation Income Tax rules.
A PREC is a corporation that a Real estate salesperson or broker may establish that is permitted to directly receive from a real estate brokerage remuneration that is earned by the salesperson or broker in Ontario.
How does it Work?
The agent, brokerage, and PREC will make a “Tri-Party Agreement. A PREC is separate from the agent and acts as a go-between between the agent and the brokerage. When you, as an agent, get paid, the money goes to the PREC, then you withdraw the amount you need. The funds you withdraw will get taxed.
Real Estate and Business Brokers Act, 2002 (REBBA)
REBBA does not impose requirements on the name of a PREC. However, because the PREC cannot be promoted or advertised as being able to provide real estate trading services, it may be a consideration to not name it in such a way that would suggest or imply it is a brokerage. Another consideration in naming is that the PREC must be registered in Ontario, or continued in Ontario if incorporated outside of Ontario. A PREC is not a personal professional corporation as considered under the Business Corporations Act and therefore is not subject to naming conventions for personal corporations.
Under REBBA, PREC cannot trade in real estate. It cannot advertise real estate. PREC can have only one controlling shareholder (the broker or salesperson) who will own all equity (voting) shares of PREC. Family members (children, spouse and parents) may hold non-voting shares.
Salesperson or broker must notify the name and address of PREC to Real Estate Council of Ontario (RECO) before receiving any remuneration from the brokerage through the PREC.
How Do You Set Up A PREC?
These are the steps to set up a Personal Real Estate Corporation.
- The lawyer will draft and file articles of incorporation.
- Email the name and address of PREC to RECO.
- The lawyer will draft the three-party agreement.
- Sign the three-party agreement with the brokerage.
To set up a PREC, the corporation must meet conditions and requirements that are set out in legislation. An agreement between the registrant, PREC, and brokerage with all required content is needed, as well as the proper, legal name and address of the PREC.
Benefits of A PREC
A few benefits of a PREC are below.
- Retirement Plan: the funds saved from the tax deferral can go towards a pension plan or insurance.
- Income Splitting: if a family has shares in the PERC, dividends can be paid to split income and reduce family taxes.
- Canada Pension Plan: a PERC is flexible. If you are self-employed with a certain level of income, you will have to pay a certain amount to CPP. When you change your business to a corporation, you can get rid of the annual expense.
- Tax Deferral: this means there are more funds in the corporation for inventing, hiring, or doing more advertising.
If you want to incorporate your real estate business, work with a lawyer from start to finish. Some lawyers are very skilled in this area of law and will make the transition easy for you. Throughout the process, you will get professional guidance and legal advice from lawyers like Minhas Lawyer Services.
Minhas Lawyers LLP is a multi-practice law firm based in Mississauga. We advise and represent clients across various segments and practice areas.
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