By Minden Gross LLP's Business Law Group and Karlo Varga (Student-at-Law)
On March 4, 2020, Bill 145 Trust in Real Estate Services Act, 2020 received Royal Assent, amending the Real Estate and Business Brokers Act, 2002 (the “Act”). Most recently, on October 1, 2020, Ontario Regulation 536/20: Personal Real Estate Corporations (the “Regulation”) was filed and came into force. As a result, Personal Real Estate Corporations (“PREC”) are now permitted in Ontario. This means that Ontario real estate agents can incorporate their business through a PREC enabling them to take certain benefits of incorporation.
In order to qualify as a PREC, the PREC must satisfy the following criteria:
- it must incorporate under the Ontario Business Corporations Act;
- the real estate agent must be the PREC’s sole voting shareholder, director, and officer;
- all non-equity shares of the PREC, if any, must be owned by the real estate agent’s family members or trustees for the benefit of minor children; and
- there must be no agreement restricting or transferring the PREC’s sole director’s ability to manage or supervise the business affairs of the PREC.
If a corporation qualifies as a PREC, it will be exempt from broker or salesperson registration requirements under the Act assuming further additional criteria prescribed by the Regulation are also met.
The main benefit of becoming a PREC for Ontario real estate agents is the newly-opened tax planning avenues. Firstly, tax may be deferred by keeping the remuneration paid from the brokerage to the PREC in the PREC until the real estate agent requires the money to be paid out of the corporation by way of a dividend. Secondly, there are new opportunities for income splitting by giving family members non-voting shares of the PREC and paying them dividends, subject to the 2018 Tax on Split Income (“TOSI”) rules and exceptions.
The main drawback of incorporation is the extra administrative costs of time and money related to operating a corporation, including hiring a bookkeeper or an accountant, associated legal costs, as well as time and money spent on corporate filings.
For more information, please contact Brian Temins in our Business Law Group at firstname.lastname@example.org.