Personal Real Estate Corporation (PREC) Explained

A Personal Real Estate Corporation (PREC) is a corporation that only one real estate salesperson, associate broker, or managing broker owns. It is used to take advantage of the income and tax planning abilities of a corporation. As long as they work in real estate or help services with their real estate services, personal real estate corporations can't do anything. The real estate salesperson who has the PREC licence must be the only voting shareholder and the only director or officer of their very personal real estate corporation.

How does Personal Real Estate Corporation benefit you?

The benefits of PREC include:

  • Tax deferral for life and retirement planning purposes.
  • Reduction or elimination of Canada Pension Plan (CPP) contributions
  • Income splitting with family members under some conditions may reduce family tax.

Tax Deferral

The most important thing about setting up a Personal Real Estate Corporation is that you can defer taxes and plan for them.

Without a PREC, you would be taxed at the personal income tax rate, which is a combination of federal and provincial rates. This rate can be very high if you earn a lot of money and fall into one of the higher tax brackets. People in Ontario who make $300,000 a year would pay income tax at an average rate of 42% and a marginal rate of 54% if they lived in that state.

Real estate service revenue will be taxed at a lower rate if you get a PREC. The corporate tax rate is much lower. On the other hand, in Ontario, you pay 12.2% in small business corporate tax on the first $500K of income you make in your PREC. It will be up to you how much money you get from the business after you pay corporate taxes. You can get a salary or dividends, which will be taxed at your income tax rate or dividend tax rate. It's possible to pay yourself when you think you'll be making less money in the future, like when you retire or take time off. This will cut down on the amount of taxes you pay.

Reduction or elimination of the Canada Pension Plan

If you are an agent in real estate who doesn't have a PREC, you are paid a salary and you have to pay into the Canada Pension Plan (CPP), which often takes up a lot of your money (around 10% for an income of $60,000). With a PREC, you can decide whether you want to pay yourself a salary or get paid in dividends. There is no need to pay CPP contributions on dividends that you pay yourself. This means that you can invest and save for your retirement with the money.

Income Splitting with Family Members (only in specific situations)

The real estate agent should be one shareholder with voting shares in the Personal Real Estate Corporation. Family members can own non-voting shares in the company, but they can't vote. A new tax called the Tax on Split Income (TOSI) came into effect in 2018. This means that dividends paid to family members have to be taxed at the highest rate. The most common one is that a family member who is actively involved in the business does not have to pay TOSI. This means that if one of your family members is over 18 and works more than 20 hours a week in the PREC, they may be paid a dividend. This dividend will be taxable at their rate, not the highest marginal rate that TOSI charges. People can also be active in business if they have worked at least 20 hours a week for five years.

How Do You Set Up PREC In Ontario?

They can start their businesses as soon as October 1, 2020, when the law changes. To become a PREC in Ontario, you need to register with the Real Estate Council of Ontario and have your PREC's name and address approved by them first. PRECs in Ontario have to have a business address in Ontario to be able to work there. To make things even more complicated, you also need to file your Articles of Incorporation.

The Ontario Real Estate Association (OREA) has a list of PREC resources for real estate professionals who want to start their own Personal Real Estate Corporation on their website. These resources include guides, PowerPoint presentations, videos, and more.

Ontario's Real Estate and Business Brokers Act doesn't require the naming of PRECs because they aren't businesses. In a PREC, there can only be one person who owns a share of the equity. If you have a PREC with your spouse or another person, they can't own any equity shares (voting shares), and they can't be paid by the PREC itself.

How Do You Set Up PREC in Quebec?

The steps to setting up a personal real estate corporation in Quebec are:

  1. Choose a name that fits your PREC business. As a rule, your business must have a French name in Quebec. You must also follow a few other rules for naming your business, which are found in the Quebec Enterprise Register.
  2. Use the search tool in the Enterprise Register to make sure that the name you want for your PREC isn't already being used by someone else.
  3. It's time to pick a place in the province of Quebec to be your main office.
  4. You need to send the Articles of Incorporation and the First Declaration to the Quebec Enterprise Register.
  5. Pay the fees for your initial declaration that the Registrar says are due. Afterward, you will get a Certificate of Incorporation and a number for your province called a "Quebec Enterprise Number" (NEQ).

How Do You Set Up PREC in Alberta?

To start a PREC in Alberta, you need to do the following things:

  1. Choose a name for your business that fits.
  2. Get an Alberta NUANS report: this is a check to make sure that there isn't already a business with the same name as the one you want to start.
  3. Complete your Articles of Incorporation.
  4. Choose a place for your business to have its main office (the address must be in Alberta). Then, complete the Notice of Address.
  5. It is time to complete the Notice of Directors (you should be the sole director of your PREC).

Send in the application package with all the forms you've filled out, along with the fee and a valid ID. 

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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