- What is a PREC? (Professional Real Estate Corporation)
What is a PREC? (Professional Real Estate Corporation)
Are you a Real Estate Agent wondering if you should incorporate?
Since 2005 TRREB has been fighting on behalf of Real Estate Professionals for the ability, like Lawyers, Accountants and Engineers, to incorporate. This is finally possible as of October 1, but what are the benefits and SHOULD YOU?? Benefits include:
- Corporate income tax rates
- Tax deferral opportunities
- Increased Retirement Savings Abilities
- The ability to invest excess income into income producing assets
- Income splitting opportunities
- Possible lifetime capital gains qualification
- Possible limited liability
From George Dube at the Business Development Bank: “Many factors affect your decision to incorporate, but it takes little profit to make incorporation worthwhile, contrary to what some people proclaim. In my opinion, a profit of $20,000 that can be kept at the corporate level, or directed to other family members, can justify the costs involved. Do the math instead of just listening to the claims. The quick math is:
On a profit of $100,000, a realtors combined taxes is 43.41%, but if you leave $20,000 in your PREC, only paying 12.2% in taxes, that provides you a tax deferral of over $6,000. Now imagine the savings on $50,000, $100,000 or more, and then add to that what the beauty of compound interest could do for your next egg!”
If you don’t spend everything you make in a fiscal year, you should be thinking about incorporating!
What do you do with your Tax Savings?
These savings can be used to build your business, pay family members who work for you, take advantage of greater retirement savings options, invest money and accumulate Real Estate.
Make sure this makes sense for you. If you need less than you make, it probably does. Get advice from your Lawyer and Accountant. Once you’ve decided to proceed, make sure your Brokerage is on board with paying commissions to your PREC. There should be a written agreement. Then you can go ahead and incorporate.
Frequently asked questions on PREC’s
What is the structure of the PREC?
--It is a Personal Corporation. There can be only one owner, that being the Real Estate Agent/Broker
--The Real Estate Agent must be employed by a Brokerage
--There must be an agreement, in writing between the Corporation, the Agent and the Brokerage
--It must be an Ontario Corporation
--You can use a Corporation you may already have, as long as it abides by the rules of a PREC
--There can be only one Director/Officer, the incorporator, and only one equity shareholder, however there can be
non-equity family member shareholders
--Your Brokerage would pay any commissions you earn directly to your PREC, and the PREC would pay you
Can a PREC be a brokerage or deal with Trust monies?
--No, a PREC cannot be a brokerage, cannot have a trust account and cannot hold deposits in trust
I am part of a Team~can we incorporate a Team PREC?
--No, all agents~every team member~ being paid a commission, must have their own PREC. This also applies to
husband and wife teams.
What is the difference between Salary and Dividends?
--The Salary you choose would be paid by your PREC, minus the applicable personal taxes and CPP. Salary also
allows for RSP deductions
--You can also choose to receive Dividends, which are taxed at a different rate, and are not subject to tax/CPP
withholdings. Your Accountant will advise on what makes the more sense for you
Can I pay my kids dividends from the Corporation?
--Yes! As long as they work a minimum of 20 hours a week for you
Does the PREC have to register with RECO?
--No, there is no registration with RECO requirement and no payment required. The agent must advise RECO
of the Corporate name and address
How is Liability handled with a PREC’s?
--PREC’s do not protect agents from any findings of negligence. Any settlement would still come out of the
Agent’s personal insurance. Limited Liability might possibly occur in cases of loans where the agent did not
sign a personal guarantee
I already have an HST Number-How is that handled?
--Your PREC must have its own HST number. Your number will be cancelled. If the PREC owes more than $3,000
per year in HST, it will have to pay corporate HST installments
Can I use my personal Bank Account and Credit Card for the Corporation?
--You should open a new bank account and have a new credit card issued solely for your corporation
--Keep all receipts, expense records separate for the Corporation
What are my obligations and costs to incorporate?
--You will have extra Accounting costs of approximately costs of around $2,000 per year to manage your Tax filings
--You will need to file an Annual Return every year with CRA
--Incorporation costs can run into the thousands (McHines Corporate Services charges $850.00 + HST)
--You may need to pay HST In installments
Can I incorporate now and utilize my PREC for 2020 income and expenses?
--OREA has suggested to RECO that the PREC regulations do not appear to prohibit a brokerage from paying compensation for PENDING transactions to the PREC of a Registrant and that the policy thrust of TRESA and the regulations is to ensure compliance at the time of Payment. This assumes the Realtor was a registrant at all times.