With the ever-changing face of the Canadian real estate market, much consideration has been given by every real estate professional on how to conduct their businesses with as much ease as possible. One of the widely explored avenues in this regard is setting up a PREC. A PREC will have some advantages on grounds of tax, liability issues, and flexibility for real estate agents who would be qualified to incorporate their businesses.
Below, we have outlined everything one needs to know about personal real estate corporations in Canada—from what they are, how they work, and their pros and cons. Whether you are a seasoned agent or fresh off the presses, this guide will help you decide if incorporating as a PREC will be right for your career.

What is a Personal Real Estate Corporation (PREC)?

A PREC in Canada is a corporation available only to licensed real estate agents and brokers. Traditionally, real estate agents operate as sole proprietors. In recent times, however, many provinces have allowed agents to incorporate their businesses as a PREC. This was to afford agents the benefit of the corporate tax structure.
In other words, a PREC would allow licensees to practice their profession through a corporation in conformity with the provincial regulatory bodies overseeing real estate.

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How Does a Personal Real Estate Corporation Work?

A PREC is no different from any other corporation in Canada but is specially designed to meet the legislated requirements for real estate licensees. In this type of corporation, a real estate agent can sell services through the corporation and receive commission income directly within the PREC. Real estate agents practicing under a corporation have to satisfy the individual licensing of real estate agents as demanded by the provincial real estate boards. Practically, this means they remain personally liable to conform to industry rules and regulations.

Key Features of a PREC:

  • Is owned and controlled by the licensed real estate professional
  • Corporation can collect commission income, deduct business expenses, and distribute profits
  • Agents are still required to be licensed under the applicable real estate act and regulations.

Benefits of a Personal Real Estate Corporation

Overall, incorporation as a PREC results in more financial and legal advantages, especially for those real estate agents who earn high income. This is for the following reasons:

  • Tax Savings and Deferral: By setting up a personal real estate corporation, tax savings could perhaps be the big benefit thereof. In Canada, companies pay lower tax rates compared to individuals. Whereas personal income tax rates for some provinces may be as high as over 50 percent, these corporate tax rates are considerably lower—often between 12 to 15 percent. It is in this manner that real estate agents can retain more of their profits inside the corporation and delay paying personal income tax on the earnings until they draw the funds out as salary or dividends. This can be particularly useful for agents who do not need to immediately access all of their income for personal use, as they can take advantage of tax deferral strategies and invest the retained earnings.
  • Limited Liability: Operating through a personal real estate corporation can also afford limited liability protection. As a sole proprietor, real estate agents are personally liable for the debts and obligations of their business. With incorporation, however, there can be some protection afforded to the personal assets of agents from business liabilities. Not necessarily against professional negligence or real estate-related liabilities, but at least partially in other spheres, such as general business debt or issues relating to contractual disputes.
  • Income Splitting: Another possible benefit of incorporating as a PREC is the potential to split income. Income splitting refers to the process of distributing income to family members in a lower tax bracket to minimize the overall family tax burden. In some instances, it makes provisions for dividends to be distributed to family members through a PREC to enable agents to take advantage of the income-splitting tax-planning opportunity. Though it is important to consult a tax professional, the government of Canada does bring in rules that restrain certain income-splitting strategies through Tax on Split Income, or TOSI.

Eligibility to Incorporate a Personal Real Estate Corporation in Canada

Every real estate practitioner does not have the license to incorporate their practice into PREC. Though the eligibility criteria for PREC vary more or less from province to province, some general eligibility criteria must be met. The basic ones are:

  • Licensing: It must be owned and operated by a licensed professional in real estate. The agent or broker must be a controlling shareholder and actively licensed under his or her provincial real estate regulatory authority.
  • Director and Shareholders: The real estate agent must be the only director and voting shareholder of the PREC. Non-voting shares may be issued to family members, which can assist with income-splitting strategies.
  • Corporate Structure: The PREC would need to follow certain set regulations of the provincial real estate board or council. Some of these regulations could be regarding things like restrictions on the type of business activities that the corporation could conduct other than real estate.
  • Professional Services: The agent would still be personally liable for professional services that they offer, which means that incorporation does not shield the agent from professional misconduct or negligence claims.
  • Province-Specific Regulations: Each province has its legislation on how to establish a PREC. As for example, British Columbia has differentiated legal machinery or legislation from Ontario and Alberta, and it is advisable that specific legislation in your province be given due consideration.

If you would like to register a PREC Ontario, this article will be useful:

Steps to Incorporate a Personal Real Estate Corporation

Setting up a PREC consists of a lot of steps that one has to follow with due care in order to be compliant not only with corporate law but also with the regulations of real estate.

  1. Seek Professional Advice: Before incorporating, it would be wise to consult with a tax advisor as well as a corporate lawyer. They can help you decide whether incorporation would result in the most beneficial financial position for your real estate company and inform you specifically about any regulations in your province.
  2. Incorporate the Company: You will need to register your corporation with your provincial government. This includes filing the necessary documents, reserving a unique business name, and paying the incorporation fee. Nuans Canada Online can incorporate a PREC within a few business hours, you can follow this link for more details.
  3. Apply for Real Estate Regulatory Approval: As the PREC is in a self-regulating profession, you must notify your provincial real estate board or council and also comply with any other requirements that they may have. This could include the submission of additional forms along with supporting documents.
  4. Set Up Your Company’s Bookkeeping System: After obtaining your PREC, you have to set up corporate bank accounts, pay yourself as a shareholder, and retain the services of an accountant to maximize the highest possible tax planning benefit. Remember that your corporation has to follow the rules with income splitting or you will be subject to a penalty from the CRA.

Drawbacks and Considerations of Incorporating as a PREC

While the benefits of incorporating as a personal real estate corporation can be significant, there are also some drawbacks to consider.

  1. Costs of Incorporation and Maintenance: Incorporating comes with costs, including legal fees, government filing fees, and annual accounting fees. Running a corporation requires additional record-keeping, corporate tax filings, and compliance with both corporate law and real estate regulations. For smaller real estate agents with lower income, these costs may outweigh the benefits.
  2. No Protection from Professional Liability: Although a PREC provides limited liability protection for business debts, it does not shield you from professional liability claims. Real estate agents remain personally responsible for any professional misconduct, negligence, or errors.
  3. Complex Tax Rules: The tax benefits of a personal real estate corporation come with increased complexity. Canadian tax rules, particularly around income splitting and tax deferral, are strict, and non-compliance can result in penalties. Therefore, it’s essential to work closely with a tax professional who understands the unique needs of real estate professionals.

Is a Personal Real Estate Corporation Right for You?

A Personal Real Estate Corporation offers numerous advantages for real estate agents, especially those with high incomes, large teams, or long-term financial planning goals. However, incorporating as a PREC isn’t for everyone. It’s important to weigh the costs and complexity of running a corporation against the potential tax savings and other benefits.
If you’re unsure whether a PREC is right for you, consider the following:

  • Do you consistently earn a high income that could benefit from corporate tax deferral?
  • Do you have family members who can benefit from income splitting?
  • Are you prepared to handle the administrative and legal responsibilities of running a corporation?
  • Do you plan to reinvest your earnings in the corporation rather than withdrawing them immediately?

If the answer to most of these questions is yes, then incorporating as a PREC may be a smart financial move.

Conclusion: Maximizing Your Real Estate Business with a PREC

A Personal Real Estate Corporation can be a powerful tool for real estate agents looking to optimize their tax strategy, protect their assets, and grow their business. While the process of incorporating requires careful consideration and professional guidance, the potential benefits can make it worthwhile for many real estate professionals.