Personal Real Estate Corporation or PREC
A Personal Real Estate Corporation (“PREC”) allows a real estate agent to take advantage of the benefits of incorporating a real estate business. It is great news for realtors as it allows real estate agents in higher tax brackets to defer taxes and save on taxes. Much like doctors, lawyers, engineers, and accountants it is now possible for real estate agents to incorporate their business. If a real estate agent incorporates their business, they will be entitled to the same advantages as other professionals.
For a real estate agent to incorporate a Personal Real Estate Corporation, according to the newly announced regulations, the following is required:
- The PREC is incorporated or continued under the Business Corporations Act.
- The real estate agent owns all of the equity shares of the PREC as the controlling shareholder.
- The sole director of the PREC is the real estate agent.
- The president of the PREC is the real estate agent.
- The non-equity shares of the PREC are owned by the real estate agent or a family member or in trust for a family member.
- There is no written provision by agreement or otherwise or arrangement that restricts or transfers in whole or in part the powers of the sole director to manage or supervise the management of the business and affairs of the Personal Real Estate Corporation.
What is a Personal Real Estate Corporation (PREC)?
A PREC is a real estate corporation that allows a real estate agent to incorporate their business. The benefits of incorporating include limiting liability, reducing corporate income taxes and potential capital gains on the sale of a real estate practice.
What tax savings are available for a Personal Real Estate Corporation (PREC)?
By incorporating, numerous tax advantages become available for a real estate agent in Ontario. Unless incorporated, a real estate agent likely reports income as a sole proprietor. This means that the real estate agent pays taxes on the full amount earned without deferral, separation or the ability to split with family members. By incorporating a Personal Real Estate Corporation, a real estate agent will be able to claim deductions and defer income taxes and split income with family members. Most importantly, income taxes will be payable at a corporate level as opposed to a personal level.
In short, the real estate agent will be able to pay personal taxes on only the amounts withdrawn personally from the Personal Real Estate Corporation. For example, if a real estate agent earns $250,000 in commission they will pay income taxes on the entire amount minus applicable deductions. With a Personal Real Estate Corporation, if a real estate agent makes $250,000 in commission, they will pay corporate taxes and then personal taxes at their personal tax rate only to the extent that they withdraw funds from the Personal Real Estate Corporation for their own personal use.
For high income earners who do not need their entire earnings immediately, there is an opportunity to defer personal income, and therefore personal taxes, to a later date in the future. This is particularly beneficial for a realtor whose earnings fluctuate significantly year over year depending on the timing of their closings.
What are the Advantages of a Real Estate Personal Corporation?
Incorporating a real estate business has many advantages:
- Reduced corporate tax rate of 12% plus personal taxes depending on how much is withdrawn personally as opposed to more than 40% personal taxes on all earnings.
- Tax deferral opportunities allow to grow on a tax deferred basis through various investment vehicles held by the PREC.
- Income splitting between among spouse. Of course, the TOSI rules (tax on split income) rules still apply.
- Limitation of personal liability.
- Possible future savings on capital gains on the sale of a qualifying business.
What are the Disadvantages of a Real Estate Personal Corporation?
- Incorporation costs are typically in the range of $1,500 to $2,500.
- Accounting fees for corporate filing are typically in the range of $1,500 to $2500.
- Reduced advantage if a real estate agent uses all earnings for personal use in the year earned.
In most cases, the advantages of incorporating a Real Estate Personal Corporation greatly outweigh the disadvantages. Real estate agents have been pushing to be allowed to incorporate for years. Now that it is available, it is time to take advantage of the changes to the regulations that allow for a PREC Personal Real Estate Corporation. Do you have questions about a PREC Personal Real Estate Corporation? Feel free to contact us or give us a call at 613-440-4888. We would be happy to offer any real estate agent a complimentary initial consult.