Personal Real Estate Corporation: What to consider from the legislation

With the passing of legislation for Bill 145, it’s now possible for realtors in Ontario to establish a Personal Real Estate Corporation (PREC). If you haven’t had a chance to review this, you can check out a high-level summary of the enacted legislation on the Government of Ontario website, here.

If you’re thinking about a PREC, the following opportunities should be considered by real estate professionals:

1. Only the controlling shareholder can own equity shares (i.e. voting shares) of the PREC, and a holding company (that generally includes family members as shareholders) may own the non-equity (non-voting) shares. This structure could allow an unregistered PREC to pay dividends to the holding company, allowing the holding company to buy and hold/flip real estate properties.
   
   
2. A PREC should be able to use excess funds to hold passive investments and other active business unrelated to trading in real estate.
   
   
3. If the PREC and the non-PREC (i.e. The holding company) are structured properly, you'll be able to take advantage of several tax planning opportunities such as:
   
   
   • a) Multiplying the small business deduction which allows for the first $500,000 of active business income earned to be taxed at a rate of 12.2%. The grind to the small business deduction that results from earning passive income could also be avoided.
     
     
   • b) Real estate professionals and family members can avoid the Tax on Split Income (TOSI) rules when splitting income.
     
     
   • c) Income tax deferrals, which may be possible while simultaneously avoiding the risk of punitive tax rates associated with personal service businesses or incorporated employees.

While there are numerous opportunities available with incorporation, the structuring considerations of the PREC need to be handled extremely carefully. If you have any questions about potential opportunities for incorporation, or wish to discuss the legislation further, let us know and we can set-up a time that works for you.

For the latest insights and information on personal real estate corporations, visit our PREC hub.