On October 1, 2020, the Ontario government amended the Real Estate and Business Brokers Act (the “Act”) to expand on the terms that brokers and salespersons may use to describe themselves in advertising, and replaces references to “commissions and other remuneration” with “remuneration”. The Act was amended to permit a brokerage to pay remuneration owed to a salesperson or broker for trading in real estate to a corporation. The corporation, or PREC, is required to meet specific criteria that will be laid out further below.
What is a PREC?
A PREC is a corporation that a salesperson or broker (hereinafter referred to as the “Controlling Shareholder”) may incorporate, pursuant to the Business Corporations Act (Ontario), or continued in Ontario, if incorporated outside of Ontario, to directly receive from a brokerage remuneration that is earned by the Controlling Shareholder.
Criteria of a PREC
The Controlling Shareholder must own, either directly or indirectly (for example, through a holding company), all of the equity shares (voting shares) of the PREC and must also be its sole director and officer.
Pursuant to the Act, family members are permitted to, either directly or indirectly, own non-equity shares (non-voting shares). Family members are defined in the Act as the Controlling Shareholder’s spouse, child(ren) or parent(s), or a trust for a minor child(ren) of the Controlling Shareholder.
The Act provides that the Controlling Shareholder must be registered as a broker or salesperson and employed by the brokerage that pays his or her remuneration to the PREC instead of to the Controlling Shareholder. This governing relationship between the brokerage, the PREC and the Controlling Shareholder must be established in a written agreement.
What, if any, are the Restrictions?
A PREC cannot trade in real estate, other than to provide the services of its Controlling Shareholder. The Act does not provide for any specific naming criteria; however, the name of the PREC also cannot represent to the public that it trades in real estate.
The PREC must also not, on behalf of the brokerage, either directly or indirectly, hold any money or other property of a person in connection with the trading in real estate.
Real Estate Council of Ontario (RECO)
A PREC is exempt from registering under the Act; however, the Controlling Shareholder must provide RECO with his or her full legal name, the name of the PREC and the address for service of the PREC by e-mailing firstname.lastname@example.org.
Advantages of Incorporation
Salespersons or brokers can incorporate a personal real estate corporation to hold their income for tax deferral purposes and/or for income splitting. With respect to tax deferral, the PREC will be eligible to be taxed at the lowest corporate rate. In addition to tax deferral, the PREC may take advantage of income splitting. As previously mentioned, family members are permitted to hold non-equity shares of the PREC; this allows the PREC to pay dividends to the family members and therefore reduce or split the family’s income.