Personal Real Estate Corporation (PREC) Explained

Hi there, My name is Jaclyn Cairns, and I am here to talk to you about Personal Real Estate Corporations or PREC for short.

What is a PREC?

A PREC is a personal corporation that real estate agents and brokers can establish. And this is brand new legislation that was enacted in Ontario on October 1st, 2020. So for the purposes of this video, just for reference, we'll use agents to refer to both the agents and the brokers in context of talking about PREC.

How does a PREC work and what are the benefits to incorporating?

As background, a PREC will be a completely separate legal entity from yourself, the agent. So it's going to act as an intermediary between the brokerage house that you work with and yourself.

In terms of the flow of funds for your commissions, what will happen is that when you earn a commission that amount will be paid directly to the PREC rather than you as the agent, and then as the agent, you have discretion to pull out funds from the PREC to cover your living expenses, and to the extent that you withdraw any funds from the PREC, only those amounts are subject to personal income tax. The big benefit from that is you can if you're a saver or depending on your income level benefit from the very large income tax deferral which I'll talk about later.

Just one thing to know in terms of mechanics, you, your PREC and your brokerage house will enter into a Tri-Party Agreement that outlines this relationship that you will have to allow your PREC to be paid directly.

There are five primary advantages that you may benefit from, and the largest two that we'll talk about today is the income tax deferral that I mentioned, and just a greater abundance of opportunities for retirement and then estate planning above and beyond your regular RRSP's and tax-free savings account options.

There are advantages potentially to split income with other family members that may be involved in your business to the extent that they have an active role in your business, and we sort of define that as contributing within a labor capacity of up to 20 hours per week, or in a retirement context, once you hit the magic age of 65, there are further income generating opportunities, but for the most income splitting is going to be a more minor benefit to incorporating.

There's also a little bit more flexibility in terms of whether you pay into CPP or not, and what makes sense for you and your personal financial situation, and there is the potential to benefit from a significant tax savings in the event that someone would like to purchase your PREC but those situations are going to be few and far between.

So, the big question is, you saying they're the real estate agent, should I actually incorporate?

We've already talked about that that in-context referral is going to be your primary motivator in deciding whether or not incorporation makes sense for you.

And so, in our example we are going to look at a real estate agent, we're going to call him Justin, and Justin makes on average $300,000 after his expenses. And that would generate a tax bill of about $121,000, then because he is not incorporated he would be subject to pay CPP, both the employee and the employer portion, which adds another $5,800 to his tax bill, and then assuming that Justin's lifestyle requires about a $100,000 to live, he would have just shy of $73,000 to invest at a personal level, and those are things that he can put into his RRSP's, tax-free savings account, registered investments, other properties, whatever it is that he might have an interest in. If I contrast that to what Justin's income situation would look like if he was incorporated, if he makes that same $300,000 at the corporate level, his corporate tax bill will only be $36,600. Then, to facilitate Justin's a $100,000 of expenses that he needs to pay personally, a $126,000 dividend would be declared to Justin on which he would pay personal tax of $26,600.

And so when I compare how much cash Justin would have available to him to invest inside his corporation he'd have $136,000, just shy of $139,000 to invest in all of those good things that would allow him to further his wealth situation. So, that difference, the $136,800 compared to the $73,000 that Justin would have is a very significant income tax deferral. And so he has an additional $63,000 dollars to be able to invest with, which is quite substantial and will grow at a much faster rate just on the basis of that being a larger dollar value to start with.

In this case, Justin would be an excellent candidate for incorporation.

So the big question that's probably lingering in your mind is, what does it cost to incorporate in Ontario?

It really depends on every individual's specific situation and how complex their needs are.

You will have additional accounting fees because you'll have a corporate income file along With your personal income tax return to file, and there are also additional startup fees to just getting your PREC registered and incorporated in Ontario, and you'll likely want to talk to both an accountant and a legal professional to make sure that that is done correctly, that works in a way that is beneficial for you and your family.

You'll also have to consider if there are any significant assets that need to be transferred into your PREC from your proprietorship, so if you have a bunch of equipment, or a vehicle, or other things that you might think are beneficial to go into your PREC, the more complicated that is, the more legal paperwork needs to be filed to make those transfers effective and that can certainly drive up the cost.

And so when you're sort of considering, is it worth it for me to incorporate just from a fee perspective? I'd really challenged you to think about how big that income tax deferral is.

For someone like Justin, paying something along the lines of between five and $10,000 all inclusive is probably a small price to pay for a $65,000 savings.

If you're interested in finding out any more information in terms of setting up a PREC, or if that's right to you, please visit our website or reach out to a Grant Thornton Advisor because we are here to help.