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PREC’s in Ontario

November 27, 2020   ·   0 Comments

By Luis R. Chacin

There is a new regime in Ontario which allows brokers and salespersons registered with the Real Estate Council of Ontario (“RECO”) to incorporate a Personal Real Estate Corporation (“PREC”). This new type of corporation is subject to its own set of rules. However, the new regime is comparable to how physicians, veterinarians, dentists, engineers, accountants, lawyers and other professionals are permitted to carry on business and pay themselves through a share capital corporation established under the Ontario Business Corporations Act (“OBCA”). 

The new rules were proclaimed in force as of October 1, 2020, as amendments to the Real Estate and Business Brokers Act, 2002 (“REBBA”, to be renamed the Trust in Real Estate Services Act, 2002), pursuant to Bill 145, Trust in Real Estate Services Act, 2020, passed by the Ontario Legislative Assembly in early March 2020. Also on October 1, 2020, the Ontario government filed Regulation 536/200 under REBBA to prescribe the criteria and exemptions for registration and remuneration with regard to PRECs, along with other amendments to regulations under REBBA. 

As such, in order to incorporate a PREC, a registered broker or salesperson must be the controlling shareholder of the PREC and be providing services to a brokerage in accordance with a written agreement governing the relationship between the PREC, the incorporated broker or salesperson and the brokerage employing the incorporated broker or salesperson. The incorporated broker or salesperson must beneficially own, directly or indirectly, all of the equity or voting shares of the PREC and be its sole director and officer. The regulations provide that non-equity or non-voting shares of a PREC may be legally and beneficially owned, directly or indirectly, by the registered broker or salesperson or a family member (i.e. the spouse, child or parent of the incorporated broker or salesperson). Non-equity or non-voting shares of a PREC may also be owned by one or more individuals as trustees for the benefit of the minor children of the incorporated broker or salesperson. Also, there must be no agreement or arrangement that would restrict the powers of the incorporated broker or salesperson to manage or supervise the PREC. 

Unlike with other professional corporations, which require registration and a certificate of authorization from the profession’s governing body, a PREC is exempt from registration under REBBA and may not carry on the business of trading in real estate other than providing the services of the incorporated broker or salesperson to a brokerage. The regulations provide that only the registered broker or salesperson who is the controlling shareholder of the PREC may be paid “remuneration” by a brokerage through the PREC, provided the broker or salesperson has notified RECO of the legal name and address for service of the PREC before receiving any remuneration from the brokerage. 

A PREC may not carry on business as a brokerage and must not, on behalf of the brokerage that employs the incorporated broker or salesperson, directly or indirectly hold any money or other property of a client, customer or other person in connection with trading in real estate. However, a PREC may hold its own assets, including real estate and other investments. 

Further, the regulations also provide that the PREC, its shareholders, employees or agents must not represent to the public in any manner that the corporation carries on the business of trading in real estate. In this regard, and although REBBA does not impose any restrictions on the name of a PREC, the legal name chosen for the PREC at the time of incorporation may not suggest or imply that the PREC is a brokerage. 

Operating a business through a business corporation such as a PREC provides a number of potential tax planning benefits such as a lower tax rate subject to the small business deduction on active business income available to Canadian controlled private corporations, income tax deferrals on retained earnings as well as limited income splitting with family members in lower income tax brackets. Other tax benefits available to an incorporated business owner, including a PREC, are with regard to retirement planning, such as the Lifetime Capital Gains Exemption which allows the owner to sell the shares of a qualifying small business corporation without incurring tax on the capital gains realized up to the exemption limit. However, there are also continuing recordkeeping and filing obligations associated with carrying on business through any corporation and, as such, registered brokers and salespersons interested in incorporating a PREC should first seek professional advice to review their personal circumstances. 

*lchacin@carters.ca 

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