Real Estate

Personal Real Estate Corporations

 Are you a registered real estate salesperson or broker in Ontario? Have you heard of Personal Real Estate Corporations (PRECs)? If not, you may be missing out on some potential financial benefits.

Many real estate agencies often use brokerages to manage their finances by depositing client funds into a brokerage account and using the account to pay for expenses such as rent, salaries, marketing and tax deferral. But using a brokerage to manage finances for a real estate agency can also come with high administrative costs and regulatory burdens.

About Personal Real Estate Corporations

Brokerages are subject to regulatory examinations, such as those conducted by the Real Estate Council of Ontario (RECO), which can be time-consuming and costly for businesses. These regulations are put in place to protect consumers and ensure that brokers are operating ethically and within the law.

However, for many individual real estate agents, these additional costs and regulatory requirements may not be feasible or worthwhile, making it more challenging to justify using a brokerage for managing finances. Ultimately, businesses must weigh the potential benefits and drawbacks of using a brokerage to determine the best financial management strategy for their needs.

So, what is a PREC? It is a corporation that a salesperson or broker may establish, which is permitted to directly receive from a brokerage remuneration that is earned by the registrant. The use of a PREC may have financial advantages for the salesperson or broker. A PREC is not a professional corporation as considered under the Business Corporations Act.

The legislation has been amended to permit a brokerage to pay remuneration owed to a salesperson or broker for trading in real estate to a corporation that meets specific criteria. The new rules allow for, but do not require, the use of a PREC.

Personal Real Estate Corporations Advantage

One of the advantages of setting up a PREC is that it allows for better budgeting and financial planning. Since the PREC is a separate legal entity, it can incur expenses and generate income on its own. This means that expenses related to real estate trading activities can be paid from the PREC, and income can be deferred to future years, resulting in potential tax savings.

However, it is important to note that a PREC is not a professional corporation and therefore does not provide liability protection for the registrant. Additionally, a PREC must meet specific criteria and conditions set out in the legislation, and the brokerage must agree to pay remuneration to the PREC.

If you are interested in setting up a PREC, there are some steps you need to take. First, consult with financial and other experts to determine if a PREC is right for you. You will also need to ensure that the corporation meets the criteria and conditions set out in the legislation, and that the agreement between you, the PREC, and the brokerage includes the required content set out in the legislation.

How to Begin?

It’s also important to note that a PREC is not allowed to trade in real estate other than to provide the services of its controlling shareholder (the broker or salesperson) to a brokerage. Additionally, a PREC cannot hold any money or other property as a deposit in connection with a trade in real estate.

In conclusion, a PREC may be a viable option for some real estate brokers and salespersons in Ontario. By setting up a PREC, you can potentially save on taxes and improve your financial planning. However, it’s important to understand the criteria and conditions set out in the legislation, and to consult with financial and legal experts before making any decisions.

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