Understanding Personal Real Estate Corporations (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.
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.
What are the benefits of having a PREC?
Here are some advantages:
- Tax deferral for life and retirement planning purposes.
- Reduction or elimination of Canada Pension Plan (CPP) contributions.
- Income splitting with family members under certain conditions can lower overall family taxes.
Deferring Taxes: The Benefits of a Personal Real Estate Corporation (PREC)
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
Canada Pension Plan Contribution Reduction or Elimination with a PREC
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.
Income Splitting with Family Members in a Personal Real Estate Corporation
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.
How to Set Up a Personal Real Estate Corporation (PREC) in Ontario?
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
Setting Up a Personal Real Estate Corporation in Quebec
If you want to set up a personal real estate corporation (PREC) in Quebec, you will need to follow these steps:
- Choose a name for your business that meets the Quebec Enterprise Register’s rules. Your business must have a French name, and there are other naming rules you must follow.
- Use the search tool in the Enterprise Register to ensure that the name you have chosen for your PREC is not already in use by someone else.
- Select a location within the province of Quebec to be your primary office.
- Submit your Articles of Incorporation and your First Declaration to the Quebec Enterprise Register.
- Pay the fees for your initial declaration as determined by the Registrar. Once you have paid the fees, you will receive a Certificate of Incorporation and a Quebec Enterprise Number (NEQ) for your province.
Setting up a Personal Real Estate Corporation (PREC) in Alberta involves the following steps:
- Choose a name for your business that complies with Alberta’s regulations.
- Obtain an Alberta NUANS report to ensure that the chosen name is not already in use by another business.
- Fill out the Articles of Incorporation.
- Select a location for your business’s main office within Alberta and complete the Notice of Address accordingly.
- Complete the Notice of Directors, keeping in mind that you should be the sole director of your PREC.
- Submit your completed application package, along with the required fee and valid identification.
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FAQ
What is the next step after completing the Articles of Incorporation for setting up a Personal Real Estate Corporation in Quebec?
After completing the Articles of Incorporation, you need to pay the fees for your initial declaration that the Registrar says are due. Once the fees are paid, you will receive a Certificate of Incorporation and a number for your province called a “Quebec Enterprise Number” (NEQ).
