Helping Ottawa Realtors form
Eastern Ontario & Ottawa realtors can benefit from a PREC and set up a real estate corporation for business income earning purposes.
A professional corporation is a corporation that provides the services of a member of a profession that is regulated by a governing professional body. Certain regulated professions are permitted to form professional corporations under their governing regulations. REALTORS® are regulated by the Real Estate Council of Ontario (“RECO”) and are permitted to form PRECs under TRESA.
Only REALTORS® can be voting shareholders of a PREC.
Either the REALTOR® or the PREC or both are subject to the oversight and regulatory powers of RECO.
The PREC can only be used if specific rules and regulations are followed.
A PREC does not limit professional liability.
PREC Services We Offer Realtors in
Ottawa & Surrounding Areas
When it comes to setting up and managing a PREC, there are some factors and benefits that realtors should take into consideration.
In Ontario combined federal and Ontario corporate tax rate is 12.5 per cent on the first $500,000 of active business income. Any income above $500,000, is taxed at the general corporate rate of 26.5 per cent. By contrast, the highest personal tax rate in Ontario is 53.53 per cent on income over $220,000.
By forming a PREC you are able to leave a portion of your business income in your PREC, deferring the personal taxes on this income until you decide when the PREC pays this to you as either a salary or dividend. Having more available to invest in the PREC allows you to earn more investment income and this builds your retirement portfolio more rapidly.
With a PREC you have a structure for potentially splitting the business income to achieve certain tax benefits by paying dividends to members of your family (18 years of age or older) actively involved in the business.
To pay dividends to your adult family members, they must become shareholders of your PREC.
Generally, if the family member receiving the dividend is actively involved in the business activities of the PREC (which the Canada Revenue Agency has indicated would be met if they work an average of 20 hours or more per week and which your advisors may wish to calculate flexibility), or is significantly contributing to the business, or if the controlling registrant is 65 years of age or older, then income splitting may be achieved.
Each individual resident in Canada may claim a Lifetime Capital Gain Exemption (LCGE) to shelter capital gains on the disposition of qualified small business corporation (QSBC) shares.
The LCGE was increased in 2014 to $800,000 for dispositions of QSBC shares and is indexed for the years after 2014 (for 2020 it is $883,384 and you can find the current year LCGE on the Canada Revenue Agency website).
Benefits of Forming a PREC in Ontario
From income splitting and passive investment to equity and more, PRECs bring realtors a slew of benefits.
A professional corporation allows a professional to benefit from some of the tax advantages available to traditional private corporations, while protecting the public by ensuring that the professional remains professionally regulated, disciplinable, and liable in relation to the professional services provided through the professional corporation.
Disadvantages of Opting for a
While a PREC is an excellent solution for many realtors in Ottawa and across Ontario, it’s not for everone. Let’s explore some potential disadvantages.
PRECs are a separate entity from you as a real estate professional, which means that you are required to file a separate income tax return for your corporation. The obligation to file payroll and HST returns will shift from you personally to the PREC, so you will need to close the personal payroll and HST accounts once you have filed any final personal returns.
You will also be required to file a separate annual corporate return, in addition to the income tax return. In addition, you will incur legal costs when you initially incorporate your business, prepare required PREC contracts, and on an ongoing basis to keep your corporation in good standing.
If you decide to operate your business through a PREC, you will remain personally liable for the services you provide to Ontario’s consumers and will be held accountable by RECO for breaches of TRESA and misconduct.
A PREC is not a mechanism for avoiding professional liability. Simply put, whether or not your form a PREC, you are personally required to meet all professional obligations and responsibilities outlined in TRESA.
PREC regime follows the single registrant model.
Each PREC may have only one REALTOR® associated with it, who must solely control the PREC.
As a result, the PREC may only receive compensation from the brokerage for trading in real estate conducted by the controlling REALTOR®, not on behalf of multiple REALTORS.
Frequently Asked Questions
Here are some of the most frequently asked questions we get about PRECs from our clients:
Each PREC must only have one single real estate agent associated with it who has complete control over the PREC. A group of realtors cannot form a PREC together. You also are not allowed to make another realtor a shareholder of your PREC.
If you have more questions about setting up a PREC and how our team can help, contact us today!
Like any business decision, there are benefits and drawbacks. Whether it’s a good idea for you to set up a PREC depends on how you want to run your business. PRECs cost more to start and maintain, but they have many benefits related to tax deferral, tax deductions, income splitting, and more.
Our team at BECK Ltd. can help you determine whether you’re in the best financial position to set up a PREC as a realtor. To get started, contact our team.
You can potentially split the business income to achieve certain tax benefits by paying dividends to members of your family (18 years of age or older) who are actively involved in the business. You are required to make your family members shareholders of your PREC in order to pay them dividends. For instance, the lower-income family member can transfer the dividend to the higher-income family member, who may be able to use the tax credit for dividends and save tax.
If you’re interested in setting up a PREC as a realtor in Ottawa, contact our team to get started.