Benefits Of Incorporating a Personal Real Estate Corporation (PREC)

Being a real estate agent is equivalent to being an entrepreneur. You have to advertise the property and take care of the documentation, repairs, and other work till the sale is complete. The profession is so demanding that you even need a provincial license. The government allows licensed real estate agents, mostly sole proprietors, to incorporate as a Personal Real Estate Corporation (PREC). 

Things to Consider Before Registering PREC 

While a PREC has the benefits of a corporation, its requirements are different. Hence, before jumping on to the prospect of PREC, you should carefully consider several aspects to see whether incorporation is the right decision. 

Provincial Rules For PREC 

PREC is registered under the provincial tax laws, which means the requirements may differ from province to province. Every province may have different rules regarding shareholding. Some may require the owner to have a minimum percentage of shares in the corporation, while some may require the owner to have 50% or 100% of voting shares. Provinces also have rules regarding who should own the non-voting shares (spouse, children, parents) and who can be officers and directors of the corporation. 

Some provinces have more detailed requirements, such as permissible names for the corporation and the type of advertising they can undertake. Certain provinces may require you and your firm to have a license, while some may allow you to operate as an individual agent and a PREC. 

Benefits of PREC

Once you familiarize yourself with the PREC requirement of your province, you can move to the next step of justifying whether incorporating is a good decision by evaluating the benefits of PREC. 

Tax Benefit: Most financial and business decisions have a tax angle. Canada’s tax structure is designed such that the corporate and individual taxes add up to a similar effective tax rate. By incorporating into a PREC, you will be eligible for the small business deduction, under which the federal corporate tax is 9% on the first $500,000 business income. But this 9% tax applies if you keep the money in the business. If you withdraw that money, it becomes your personal income and is taxed accordingly. It means you pay corporate tax + income tax. 

Then how is PREC a benefit? Suppose you earned $100,000 in a year. You can defer your tax by choosing when to withdraw. If you withdraw the entire amount in the same year, you avail no tax benefit. But if you withdraw $50,000 this year and $50,000 next year, you reduce your effective tax rate. This tax deferral is not the main benefit. 

The benefit is that when you defer your tax, you have more money in your PREC for business expenses or investing in stocks and mutual funds. 

Hiring Spouse and Income Splitting: Just as you can defer tax, you can divide your withdrawals among family members. In the above example, if you hire your spouse to take care of advertising, you can divide the withdrawal between you and your spouse. However, ensure that your transaction does not fall under the Tax on Split Income (TOSI) or that income will be subject to the highest marginal tax rate of 33%. It is better to consult a professional accountant as the TOSI rules can be complicated. 

Legal and Debt Liability: Another benefit of PREC is that it creates a separate legal entity independent of your personal assets. If you operate under the PREC, all debt and legal obligations apply to the company and its assets. Your personal assets remain safe. However, you will still be accountable for professional misconduct in some provinces. 

Cost and Effort of Operating a PREC

When considering PREC, ask yourself if the above benefits are significant enough to incorporate, as operating a corporation is expensive. Registering as a PREC requires legal and accounting work, from shareholder agreements to financial statements. 

And once incorporated, you must ensure you keep your books of accounts updated. It shouldn’t happen so that legal and accounting costs eat up all your tax savings. Unless your business earns significant revenue, keeping your operations as a sole proprietor may be viable, even if the tax bill is high. However, such business decisions shouldn’t be taken in isolation. Every situation is different, and the above considerations are generic. 

Contact KSSP Partners LLP in the GTA to Help You With PREC

A skilled accountant will consider your financial situation and growth prospects and suggest if PREC benefits you by explaining the benefits and legalities involved. They can guide you on every step of PREC registration and financial statements. To learn how KSSP Partners LLP can provide you with your business planning and strategizing, contact us online or by telephone at 289-554-5997.