Business Law / Real Estate Law

Real Estate Agents & Brokers Now Permitted to Incorporate in Ontario

As of October 1st, a new Ontario regulation permitting the creation of Personal Real Estate Corporations has come into force. The Trust in Real Estate Sevices Act (TRESA) came into force yesterday, replacing the Real Estate and Business Brokers Act (2002). For the first time in Ontario’s history, TRESA enables real estate professionals to incorporate a PREC and enjoy the associated benefits. Ontario now joins a number of other provinces where PRECs have been allowed for several years, including British Columbia, Nova Scotia and Manitoba.

This change opens up a host of new opportunities for agents and brokers, however, these changes also come with a number of financial implications. Before taking action, agents and brokers should seek the advice of experienced business incorporation and real estate lawyers. At GLG LLP, our lawyers will work with you to get your incorporation off the ground quickly in a way that maximizes your benefits, while ensuring you stay aware of your obligations under the law.

What is a Personal Real Estate Corporation?

A PREC is a form of business incorporation that allows real estate professionals to obtain the same tax and income benefits that other entrepreneurs enjoy. This is a significant change for real estate agents and brokers, who have previously been denied the same tax-saving opportunities that entrepreneurs in other industries have enjoyed for years.

In a press release on October 1st, the Ontario Real Estate Association (OREA), celebrated the news by highlighting some of the anticipated benefits it will have for realtors in Ontario:

OREA estimates that PRECs in Ontario will create 300 jobs in the province and save Ontario Realtors $14 million annually in deferred taxes – money that agents can use to reinvest in their business to hire more employees, offer better services to clients and grow their operation.

What the Benefits of Incorporating a PREC?

While the financial obligations of incorporating any business can be onerous, they also come with a number of benefits. Since realtors and brokers will now be able to take advantage of those benefits for themselves, it is important they understand just how the PREC could help them maximize profitability and grow their business more quickly. Some of the key advantages of incorporating include:

  • Achieve tax deferrals: the difference between the highest and lowest tax rate in Canada is an astounding 41%. The lowest corporate is 12.2%, while the highest personal tax rate is over 53%. A PREC will enable a realtor or broker to keep income in the business and enjoy the lowest tax rate for as long as the income remains in the business. This will allow real estate professionals to reinvest into their own business with the extra funds, and see bigger growth more quickly.
  • Lifetime Capital Gains Exemption: the LCGE allows a person who earns significant income from the sale of a small business corporation to deduct a significant amount, resulting in considerable tax savings. In 2020, for example, the exemption amount is $883,384.00. A person can use the LCGE on more than one occasion until they meet their lifetime cap.
  • Income splitting opportunities: real estate professionals can lower their overall tax burden by paying a fair salary to family members such as a spouse or a child, whose personal tax rate will presumably be lower.

The Potential Pitfalls of a PREC

Incorporating a business is always a significant undertaking, requiring a lot of work and strategic planning. There are higher up-front expenses with incorporation, and increased obligations such as the requirement to provide annual filings as well as more stringent legal regulations. However, with the guidance of a knowledgeable business lawyer, it is possible to maximize the benefits of incorporation while limiting risk and minimizing your tax burden.

This is no doubt a significant opportunity for real estate professionals across Ontario to reap the benefits of incorporation that they have previously been denied. At GLG LLP, our team is standing by to provide you with the guidance you need to establish your PREC in the most beneficial way possible. We will ensure you are aware of all compliance and tax obligations and provide strategic advice to minimize your personal risk.

The skilled business and real estate lawyers at GLG LLP in Toronto regularly assist corporate clients with a variety of issues, including the configuration and structure of a new or evolving business in a way that is most beneficial to those involved. Call 416-272-7557 or complete the online form to arrange a consultation with one of our lawyers today.