Historically, realtors in Ontario were among a small group of regulated professionals who were unable to incorporate a business. After over a decade of lobbying — and the introduction of the Trust in Real Estate Services Act (TRESA) — this is no longer the case.
Starting October 1, 2020, Ontario realtors can operate their business through a Personal Real Estate Corporation (PREC).
PREC Regulatory Criteria and Conditions
As a corporation, a PREC is a separate legal entity. This means that a realtor will create and control the corporation, while the corporation “owns” the real estate business. In order to establish a PREC, the regulations under TRESA must be satisfied.
The criteria for corporate attributes of the PREC can be summarized as follows:
- The corporation must be incorporated under the Ontario Business Corporations Act;
- The corporation has one controlling shareholder who must be registered as a broker or salesperson, and who legally and beneficially owns all the equity shares (voting shares);
- The controlling shareholder is the president, sole director, and sole officer of the corporation;
- Each non-equity (non-voting) share of the corporation must be legally and beneficially owned by the controlling shareholder or by a family member of the controlling shareholder (this includes spouses, children, parents, or a trust for a minor child);
- There is no written agreement or other arrangement that restricts or transfers the powers of the sole director to manage or supervise the management of the business and affairs of the corporation.
PREC Registration Exemption Conditions
A PREC is exempt from registration with the Real Estate Council of Ontario (RECO), and can receive remuneration from a brokerage if the PREC meets all of the following criteria:
- The controlling shareholder is employed by a brokerage to trade in real estate;
- The PREC does not carry on the business of trading in real estate other than providing the services of its controlling shareholder to the brokerage that employs that individual;
- The PREC, its controlling shareholder, non-equity shareholders, employees or agents are prohibited from representing to the public in any manner, that the PREC trades in real estate;
- The PREC does not carry on business as a brokerage;
- The PREC only receives remuneration for trading in real estate from the brokerage employing the controlling shareholder and the controlling shareholder only receives remuneration for trading in real estate from the PREC or their employing brokerage; and
- The PREC does not, on behalf of the brokerage, hold any money or other property of a client, customer or other person in connection with trading in real estate.
To be exempt from registration, there must also be a written agreement between the PREC, the controlling shareholder, and the brokerage. This agreement must govern the relationship between the brokerage and the corporation and its controlling shareholder. Specifically, under the agreement, the PREC agrees:
- Not to hinder or obstruct the brokerage, its broker of record or the controlling shareholder in the performance of their duties under the legislation;
- To provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of record to comply with their duties under the legislation and to enable the brokerage and its broker of record to ensure that the controlling shareholder is complying with the shareholder’s duties under the legislation;
- To provide whatever assistance may be reasonably necessary to enable the brokerage to determine whether the conditions set out in this section are met.
Before any remuneration is paid to the PREC, the brokerage must satisfy the following requirements:
- The PREC is exempt from registration and it has been confirmed in writing that the conditions for exemption have been met by thePREC; and
- The remuneration has been earned by the controlling shareholder of thePREC.
A controlling shareholder of a PREC that is exempt from registration can accept remuneration for trading in real estate from the PREC, if the following circumstances exist:
- The brokerage that employs the controlling shareholder pays the remuneration to the PREC instead of to the controlling shareholder; and
- The PREC cannot pay the controlling shareholder an amount for remuneration that is greater than the amount of the remuneration received from the brokerage.
However, before a PREC receives any remuneration from a brokerage, the controlling shareholder of the PREC that is exempt from registration must notify the RECO of the legal name of the PREC and the address for service of the PREC. The controlling shareholder must also notify the RECO in writing of any change in this information, or of circumstances that would affect the PREC’s eligibility for the exemption. Notice must be provided to the RECO within five days after the change occurs.
Additional Controlling Shareholder Obligations
In addition to providing notice to the RECO — and ensuring that the criteria and conditions are met — the controlling shareholder must also ensure that thePREC, if not registered as a brokerage, does not engage in any activity that would otherwise require registration.
Forming a PREC: Advantages and Disadvantages
OREA has outlined some of the significant benefits of forming a PREC, as well as several key factors to consider prior to incorporating.
- The most significant benefit of forming a PREC is the potential for tax deferral. Once a PREC exists, you can leave a portion of your business income within the corporation, and can then defer the personal taxes on that income until you decide when the PREC pays this portion out to you as either a salary or a dividend.
- Another large benefit is the potential for income splitting.
As noted above, family members can own non-equity shares of the PREC, and can then receive dividends from the PREC. This provides flexibility in how much income you wish to distribute to lower the tax burden within your family and your PREC.
- You could benefit from the Lifetime Capital Gains Exemption (LCGE) for shares of a qualified small business corporation.
Incorporating may allow you to sell the shares of your PREC and shelter the growth from tax, up to the LCGE limit.TRESA does not limit PRECs to participating only in trading real estateA PREC could potentially engage in other income-earning business activities. This will eliminate the need for you to incorporate a separate business, as you will be able to pool your funds within the PREC, and thereby avoid the unnecessary duplication of costs.
As with any decision to incorporate, there are disadvantages that must be considered.
- The first consideration is the associated costs in both creating and operating the PREC.
Many professionals who form corporations incur costs for legal and accounting assistance in incorporating the business, preparing the required contracts, filing the necessary income tax returns for the corporation, and ensuring that the corporation remains in good standing.
- It is also important to understand that a PREC will not shield you from personal or professional liability.
You will remain liable for the services you provide and will be accountable to RECO for breaches of TRESA or any misconduct.
There are many factors that must be taken into account when deciding whether to form a PREC, and there are further considerations that have not been discussed in this article, such as restrictions around advertising and structuring the corporation in accordance with applicable tax rules.
For help in navigating the laws of incorporation and PRECs, please contact one of our business law lawyers at SV Law who will be happy to assist you through the process.
The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.