Personal Real Estate Corporations: PREC-ision Required

A PREC can offer advantages, but must meet specific requirements.

If you are a real estate broker or salesperson in Ontario, you can incorporate a “personal real estate corporation”, or PREC, thanks to changes introduced in late 2020.

A PREC can be an effective tax planning tool, but there are specific requirements to set one up and maintain it, so be sure to speak with your tax advisor if you’re considering establishing one of your own.

Setting up a PREC

A PREC must have specific characteristics, including:

• It must be incorporated under the Business Corporations Act (Ontario), although not as a “professional corporation”.
• All of the voting shares of the PREC must be legally and beneficially owned, directly or indirectly, by you, although non-voting shares may be held by your spouse, child, parent, or one or more trustees of a trust for the benefit of your minor children.
• You must be the director and the president of the PREC, and there must be no other directors or officers of the PREC.
• There must be no agreement or arrangement in place which restricts your powers as a director to manage or supervise the management of the business and affairs of the PREC.

For more considerations about incorporating a new company in general, see SkyLaw’s Spotlight blog about incorporation. Some of the same considerations will apply to incorporating a PREC.

Remuneration through a PREC

If a PREC meets certain conditions, you may be able to arrange for your brokerage to pay remuneration earned by you to the PREC instead of to you personally. Those conditions include:

• You must be “employed” by a brokerage to trade in real estate. This includes acting as an independent contractor.
• The PREC must not itself carry on the business of a brokerage or of trading in real estate, other than providing your services to the brokerage.
• The PREC and its shareholders, employees, and agents must not represent to the public, directly or indirectly, that the PREC carries on the business of trading in real estate.
• The PREC must not receive, directly or indirectly, remuneration for trading in real estate from any person or entity other than the brokerage.
• You must not receive, directly or indirectly, remuneration from trading in real estate from any person or entity other than the PREC or the brokerage. In the case of remuneration you receive from the PREC, the amount must not be greater than the amount of remuneration the PREC received from the brokerage.
• The PREC must not, on behalf of the brokerage, directly or indirectly hold any money or other property of a client, customer, or other person in connection with trading in real estate.
• There must be a written agreement between you, the PREC, and the brokerage governing the relationship between the parties, in which the PREC agrees:
  • not to hinder or obstruct the brokerage, its broker of record, or you in the performance of their or your duties under the Real Estate and Business Brokers Act, 2002 (Ontario) and its regulations;
  • to provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of record to comply with their duties, and to ensure that you are complying with your own duties; and
  • to provide whatever assistance may be reasonably necessary to enable the brokerage to determine whether the conditions have been met for the PREC to accept remuneration earned by you.
• The brokerage must confirm in writing that the necessary conditions have been met.
• You must provide written notice to the registrar of the legal name and address for service of the PREC and subsequently notify the registrar of any changes to this information or any changes in circumstances that would affect the above conditions.

If a PREC meets the above conditions, it does not need to register with the Real Estate Council of Ontario (RECO) in order to accept your remuneration from the brokerage.

Other Considerations Before Incorporating a PREC

• Companies must file separate tax returns and have other annual compliance obligations, and so will incur ongoing maintenance costs.
• As distinct “persons” in the eyes of the law, corporations in general can block liability from flowing through to their shareholders. However, a PREC does not change the fact that you remain individually accountable for compliance with your own legal responsibilities, and for ensuring that your PREC does the same.
• A PREC cannot “trade” in real estate. You should speak with your tax advisor about which assets you may be able to hold in your PREC before taking any steps to transfer them in.
• RECO has published more information about PRECs and their requirements here.