Personal Real Estate Corporations (PRECs) are here! What are they and how are they different from any other corporation?
Prior to October 1, 2001, professionals generally, could not incorporate their practices, but when this was changed, realtors, otherwise known as salespersons and brokers, were left out. And thus, real estate services as a business, except as allowed by the laws that regulated brokerages, could not incorporate. Today, realtors in Ontario are able to incorporate their real estate business under the Ontario Business Corporations Act, without having to register as a licensed real estate brokerage. Thanks to Bill 104 – The Tax Fairness for Realtors Act, 2017, realtors can capitalize on many of the same tax and non-tax advantages enjoyed by other incorporated self-employed individuals.
However, unlike other incorporated self-employed individuals who are unregulated professionals (i.e., not licensed or registered as a professional in a field of practice), like realtors who trade and deal in real estate on behalf of others and who are registered or licensed under the Real Estate Business Brokers Act, 2002 (as of October 1, 2020 called the Trust in Real Estate Services Act, 2020), personal professional liability will not be limited through incorporation. This means that realtors will still be personally liable for any malpractice and errors or omissions that are a result of or incurred in the course of acting as a registered realtor.
The sole controlling (voting) shareholder of a PREC is restricted to a licensed or registered member under the Trust in Real Estate Services Act, 2020, governed by the Real Estate Council of Ontario (RECO) (i.e., a real estate salesperson or broker). However, there may be non-controlling (non-voting) shareholders so long as they are the immediate family members (spouse, children, parents or in trust for anyone of them) of the controlling shareholder being the registered realtor. In the case of controlling (voting) shares, they may be owned indirectly through a holding company, so long as that holding company is owned by the registrant. And similarly, in the case of non-controlling (non-voting) shares, the holding company must be owned by the immediate family members accordingly, or by anyone of them. Alternatively, both types of shares may be owned by a trust, so long as the beneficiaries align accordingly. The immediate family members do not need to be registered salespersons or brokers under the Trust in Real Estate Services Act, 2020, so long as their shares, directly or indirectly, are non-controlling (non-voting). Furthermore, the registrant must be the only director and officer of the PREC (i.e. the registered salesperson or broker must be the President of their own PREC). Finally, the registrant cannot enter into any side agreements whereby he or she would be restricting or delegating their authority and duties as the sole director and officer to anyone else.
Unlike professional corporations, PRECs cannot be used in team settings. A PREC is personal only to the registrant who is also its sole controlling shareholder. A PREC cannot have more than one registered salesperson or broker owning controlling shares. A PREC cannot receive remuneration from a real estate brokerage on behalf of any other registered salesperson or broker in regards to trading or dealing in real estate except for the sole controlling shareholder who is a registrant licensed with that registered real estate brokerage. If a family member is also a registrant, it will need its own PREC to receive remuneration from dealing or trading in real estate paid by the real estate brokerage for which that family member is employed under. Otherwise, that family member cannot direct its remuneration from the real estate brokerage it is employed under to anyone other than itself. However, spouses who are also registered salespersons or brokers may be non-controlling (non-voting) shareholders of each other’s PRECs, this extends to any immediate family members that are also registrants.
Unlike a typical professional corporation, the PREC’s articles of incorporation do not need to restrict its business to only the practice of that profession and activities that are related or ancillary thereto. However, the PREC cannot market, advertise or suggest that the PREC is dealing or trading in real estate, other than to provide the services of its registrant (i.e., the registered broker or salesperson) to the registered real estate brokerage for which the registrant is licensed under. Aside from doing business in other regulated professions, the PREC may conduct other business, but again, so long as it is not holding itself out as dealing or trading in real estate. This also means that the registered salesperson or broker must remain employed or contracted directly under its registered real estate brokerage despite having a PREC.
A PREC is not in any way a version or lower form of a licensed or registered real estate brokerage under the Trust in Real Estate Services Act, 2020. A PREC is not to have a trust account and nor is it to receive monies on behalf of anyone other than its controlling shareholder being the sole registrant of the PREC, directly or indirectly, in connection with trading or dealing in real estate.
PREC’s are not licensed or registered under the Trust in Real Estate Services Act, 2020 and nor are they authorized under RECO or any other governing body. Real estate brokerages can begin to honor the relationship with their registered salesperson or broker’s PREC once it determines that the PREC meets the criteria herein this article and is exempt from registration under the Trust in Real Estate Services Act, 2020 (e.g., because the PREC appears to be holding itself out or acting as a brokerage). So long as PRECs meet the requirements hereinunder this article you may begin to use them once your PREC enters into an agreement with your real estate brokerage. This agreement with the real estate brokerage must specify the following:
- The PREC agrees not to carry on business of trading or dealing in real estate other than to provide the services of its controlling shareholder to the real estate brokerage the controlling shareholder is employed under;
- The PREC agrees not to market or advertise itself as trading or dealing in real estate on behalf of itself, its controlling shareholder or anyone else;
- The PREC agrees not to carry on business as a real estate brokerage;
- The PREC agrees not to hold any money, directly or indirectly, on behalf of anyone else, including the brokerage, that is in connection with trading or dealing in real estate, as defined under the Trust in Real Estate Services Act, 2020;
- The PREC agrees not to obstruct or interfere with the brokerage or its broker of record’s ability to perform it duties the Trust in Real Estate Services Act, 2020 and any other legislation or regulations;
- The PREC agrees not to obstruct or interfere with its controlling shareholder’s ability to perform it duties under the Trust in Real Estate Services Act, 2020 and any other legislation or regulations as a registrant and as employed with the real estate brokerage;
- The PREC agrees to assist in complying with the Trust in Real Estate Services Act, 2020 and any other legislation or regulation including assisting the brokerage and its broker of record where reasonable, and its controlling shareholder from meeting its duties in law;
- The PREC agrees to reasonably comply with any request by the brokerage in order for the brokerage to further its determination in ensuring that both the PREC and its controlling shareholder are in compliance;
- The PREC and the controlling shareholder agree to direct the brokerage therein to make all payments for remuneration that is as a result of trading and dealing in real estate by the controlling shareholder to the PREC;
- That this agreement immediately terminates upon the resignation or termination of the controlling shareholder as a registered salesperson or broker employed with the brokerage, for any reason, including loosing its registration with RECO and under the Trust in Real Estate Services Act, 2020, and vice versa should the real estate brokerage loose its registration or license;
- That the PREC or its controlling shareholder notify RECO within 5 days of any change that would affect the PREC’s exemption from registration under the Trust in Real Estate Services Act, 2020 or of any information previously provided to RECO about the PREC; and
- That the PREC agrees not to pay the controlling shareholder remuneration that is more than the amount received from the real estate brokerage.
RECO will continue to regulate and will remain responsible for the registration or licensing of its salespersons, brokers and brokerages. And hence, RECO will be able to “look through” your personal real estate corporation and hold the controlling shareholder being the registrant accountable for their actions or omissions. Unlike professional corporations, there are no requirements that the name of the PREC include any specific words. However, the name shall not suggest that the PREC is trading or dealing in real estate or is a real estate brokerage or team. In that a PREC can be a numbered company. Finally, unlike professional corporations, and as of the date of this article, RECO or any of the other governing bodies do not charge an application fee or an annual authorization fee; and all-in-all, personal real estate corporations are incorporated just like any other incorporated company under the laws of the Province of Ontario, subject to the restrictions on business and ownership.
Just like any other corporation, the controlling shareholder can transfer or sell its shares to another so long as the transferee or purchaser is a licensed or registered member in good standing with RECO, or is a licensed or registered member in good standing with RECO and the sole-shareholder of the transferee or purchaser holding company. Furthermore, just like any other legal enterprise, a PREC can hire employees regardless of their profession (so long as their remuneration does not entitle them to shares if it would throw the PREC offside) or enter into independent contractor arrangements. PRECs can be partners in General Partnerships (GPs) or Limited Liability Partnerships (LLP). Furthermore, income earned through remuneration from the brokerage as a result of trading or dealing in real estate will be considered active business income and eligible for the Small Business Deduction lower tax rate on the first $500,000.00. Generally, corporate tax rates are lower than personal tax rates for the higher tax brackets, and thus tax savings through deferral and thus access to cash flows, are available when money is left in the personal real estate corporation. When selling the PREC, more specifically, the shares of the personal real estate corporation, the selling shareholder can use their lifetime capital gains exemption so long as the PREC is a qualified small business corporation. This can be achieved by ensuring that prior to selling; surplus assets are removed/drawn from the personal service corporation. The lifetime capital gains exemption allows the seller up to $800,000 in capital gains tax-free, before being taxed as taxable capital gains income. For incorporating and setting up your personal service corporation (PREC), tax advise and/or estate planning, contact Jeff Levy at Levy Zavet PC for a free consultation.