Personal Real Estate Corporation (PREC)

Qualifications

There are a number of conditions that must be met in order for a realtor to qualify as a PREC:

Sole director acts as a controlling shareholder
Must incorporate under the Ontario Business Corporations Act
Controlling shareholder must be an employee of a brokerage and certified to trade in real estate
The PREC is for one specific controlling shareholder; other businesses and investments must be managed through separate entities
The relationship between the controlling shareholder, the brokerage, and the PREC must be laid out in a formal agreement
The PREC cannot be a brokerage, and can only receive remuneration through the brokerage it is employed by
PRECs cannot hold property or money belonging to clients

Advantages of incorporation:

Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% personal taxes on entire earnings.
Lower corporate tax rate of 12.20% plus the agent’s personal taxes (depending on how much is withdrawn from the corporation) versus an average of 30% to 40% personal taxes on entire earnings.
Capital Gain exemptions_ In the event that the PREC shares are sold, in certain situations the shareholders have access to the Capital Gains Exemption. The amount changes each year, but as of 2020 equated to $883,384. The criteria to meet the exemption are extensive, and include not accumulating cash or non-business assets. Therefore, excess profits will need to be distributed to the shareholder to qualify for the exemption. This may offset the benefit depending on the situation.
Tax deferral opportunities – This allows you to grow money on tax deferral basis through various investment vehicles.
Income splitting between among spouse. Of course, be aware of TOSI rules (Tax on split income)
Insurance- PRECs allow realtors to access corporate owned life insurance, which is an excellent tool for tax savings and estate planning.

Disadvantages

Disadvantages of incorporation are usually compliance related costs:

Incorporation charges – This could range from $1,000 to $2,500.
Higher accounting fees – You might be paying higher fee for corporate filing.
Stricter compliance – You will be required to submit T4 if you decide to withdraw money through payroll for yourself and spouse.
Primarily for high income agents – No advantage if an agent needs all their earnings for personal use – that is, the advantages only exist for high income earning agents who can afford to leave some earnings in the corporation and pay lower tax rate.
Business losses -Unlike personal income tax, business losses can’t be used to offset personal taxes, and instead remain trapped in the PREC. If the utilization of losses is important to one’s financial situation, a PREC may not be the right choice.

For years, Blue Ocean has helped people just like you prepare and file their taxes, and help them receive the maximum refund on their return. With tax season upon us, contact us today, and we will discuss how we can help you receive everything you are entitled to.