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What is a Personal Real Estate Corporation (PREC)
A PREC is company designed under Provincial laws and regulations for the benefit of real estate agents. PRECs are like professional corporations designed for dentists, lawyers and doctors and similarly require adherence to strict regulations for one to realize their benefits.
The agent or salesperson must be the sole director and officer of the PREC and must own all equity/voting shares of it. Family members of the controlling shareholder may own non-voting shares, which means that they can earn dividends from the PREC subject to Tax on Split Income (“TOSI”) considerations — rules on income splitting imposed by the Federal Government in 2018.
Taxation
Standpoint
There are two main differences from a taxation standpoint between:
(a) interposing a PREC between an agent or a salesperson and a brokerage; and
(b) the agent or salesperson earning that income personally.
The first is in the tax deferral advantage of owning a PREC. Income in a PREC will generally be subject to the tax rate for small business corporations (12.2% in Ontario), meaning that the after-tax dollars in a PREC may be significantly higher than where those dollars are earned personally. This is considering the highest marginal tax bracket in Ontario is 53.53%.
As a caveat, when a dividend is paid from the PREC, a broker will then be taxed at their personal rate with a credit available to account for tax already paid by the PREC.
If after tax funds in a PREC are not immediately withdrawn, then the PREC will be able to generate additional income with the extra cash flow, through investments, or be able to put that cash flow to work in the business.
The second main advantage of interposing a PREC between an agent or a salesperson and a broker is that dividends can be paid to the agent or salesperson instead of a salary. The ability to pay dividends means, among other things, that family members can share in the profits of the business subject to TOSI considerations.
Taxation
Standpoint
There are two main differences from a taxation standpoint between:
(a) interposing a PREC between an agent or a salesperson and a brokerage; and
(b) the agent or salesperson earning that income personally.
The first is in the tax deferral advantage of owning a PREC. Income in a PREC will generally be subject to the tax rate for small business corporations (12.2% in Ontario), meaning that the after-tax dollars in a PREC may be significantly higher than where those dollars are earned personally. This is considering the highest marginal tax bracket in Ontario is 53.53%.
As a caveat, when a dividend is paid from the PREC, a broker will then be taxed at their personal rate with a credit available to account for tax already paid by the PREC.
If after tax funds in a PREC are not immediately withdrawn, then the PREC will be able to generate additional income with the extra cash flow, through investments, or be able to put that cash flow to work in the business.
The second main advantage of interposing a PREC between an agent or a salesperson and a broker is that dividends can be paid to the agent or salesperson instead of a salary. The ability to pay dividends means, among other things, that family members can share in the profits of the business subject to TOSI considerations.