Overview of Personal Real Estate Corporations
Overview
As of October 1, 2020, realtors in Ontario are able to incorporate and earn income through a Personal Real Estate Corporation (PREC). A PREC may offer various tax advantages, including the potential to (i) defer taxes, (ii) income split with family members, and (iii) access a future capital gains exemption upon selling shares of the PREC. Generally speaking, PRECs are more suitable for high income earning realtors.
For further information, you may refer to the Ontario Real Estate Association (OREA)’s Guide to PRECs and OREA’s PREC FAQ, as well as the Real Estate Council of Ontario (RECO)’s PREC web page.
Ownership Restrictions
Unlike in some other regulated professions, shareholders of a PREC may be a holding company or a family trust, as long as certain ownership requirements under the regulations are met, namely:
All of the voting shares of the PREC must be held by a licensed realtor (directly or indirectly).
Non-voting shares of the PREC may be held by a family member of a licensed realtor (directly or indirectly).
Investment Restrictions
A common question that we get asked is: What can I do with retained earnings in my PREC? Can I make other investments, such as buying real estate or investing in development limited partnerships?
The short answer is: Maybe, but there might be a better way.
A PREC is technically permitted to use its retained earnings to make investments, such as in stocks/bonds, and to passively buy and hold real estate on a one-off basis. However, the regulations restrict a PREC from carrying on the business of trading in real estate (other than to provide the services of the realtor shareholder to the brokerage). As such, it is not clear whether such restriction would apply to a PREC that, for example:
Owns a portfolio of investment properties.
or
Invests in a development project which it manages.
To avoid being offside the regulations, and generally for liability and tax planning purposes, we typically suggest that clients make investments outside of a PREC through an affiliated company.
Why Work with PNB
Our practice is primarily focused on real estate investments.
Which means, in addition to guiding you through your PREC setup, we are well positioned to advise you when the time comes to deploy your excess funds into further real estate investments.
Fixed-Fee Service
Contact us today to find out more about our fixed-fee service, which includes:
Consulting with you to determine the optimal legal structure for you.
Setting up the PREC and other ancillary arrangements.
Working with your brokerage to enter into the brokerage agreement mandated under the regulations.
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Post written by Kenneth Ng and Peter Radulescu
PNB communications are intended for general informational purposes only and do not constitute and should not be relied upon as legal advice or an opinion on any issue. All tax matters should be discussed with a qualified tax professional.