Ontario REALTORS® can now use personal real estate corporations – Miller Thomson assists OREA in crafting regulatory scheme

Introduction

On October 1, 2020, Regulation 536/20 under the Trust in Real Estate Services Act, 2020 (the “Regulation”) came into force, providing Ontario brokers and salespersons registered with the Real Estate Commission of Ontario (“Registrants”) the ability to incorporate a personal real estate corporation (a “PREC”). With this new development, Registrants have joined the ranks of Ontario professionals afforded the ability to utilize a professional corporation for their practice and access the corresponding tax, estate and income planning benefits inherent to incorporation.

Miller Thomson LLP’s team members assisted the Ontario Real Estate Association in its efforts to bring about the amendments to the Trust in Real Estate Services Act, 2020 which created the opportunity for Registrants to utilize a PREC.  In particular, we worked with the Province and OREA in various sessions to establish the shape of the Regulation and the regulatory scheme.

Overview of the PREC Regime

In sum, a PREC is a separate legal entity that receives income generated by a Registrant’s real estate practice. A sole Registrant must be the controlling individual of the PREC, holding all voting/equity shares and making all decisions in relation to the PREC.  Unlike the regime for most other Ontario professionals, which require professional corporations to register with the applicable regulatory body, a PREC is not required to register with the Real Estate Commission of Ontario (“RECO”). Brokerages will pay remuneration payable to the sole Registrant who owns and controls the PREC (the “Controlling Shareholder”) to the PREC rather than directly to the Controlling Shareholder, unlocking the lower corporate tax rate and the many tax and estate planning benefits inherent to incorporation.

PREC Criteria

The Regulation (section 2) sets out a list of characteristics that a corporation must possess in order to qualify as a PREC, namely:

1. The corporation must be incorporated (or continued) under the Ontario Business Corporations Act (i.e. cannot be a foreign, federal or extra-provincial corporation).
2. All of the equity shares (i.e. voting shares) of the corporation must be legally and beneficially owned, directly or indirectly, by the “Controlling Shareholder” (i.e. the Registrant – note this is not plural).
3. The Controlling Shareholder is the sole director and officer of the PREC.
4. Each non-equity share (i.e. non-voting share) of the corporation is,
   • legally and beneficially owned, directly or indirectly, by the Controlling Shareholder,
   • legally and beneficially owned, directly or indirectly, by a Family Member of the Controlling Shareholder (defined as a spouse, child or parent), or
   • owned legally by one or more individuals, as trustees, in trust for one or more children of the Controlling Shareholder who are minors, as beneficiaries.

There is no agreement in place that in any way restricts or transfers powers of the director to manage or supervise the business and affairs of the corporation (i.e. cannot circumvent the requirements that a Registrant be the Controlling Shareholder, owning and controlling the PREC).

PRECs Exempt from Registration

Unlike most other professional corporations in Ontario, PRECs are exempt from the requirement to register with the applicable regulatory body (RECO), provided certain exemption criteria as set out in the Regulation (section 3.1) are met:

• The Controlling Shareholder is employed by a brokerage to trade in real estate (as employee or independent contractor);
• The PREC does not trade in real estate (apart from providing the services of the Controlling Shareholder to the brokerage);
• Neither the PREC, the Controlling Shareholder nor any other shareholders or employees of the PREC shall advertise that the PREC trades in real estate;
• The PREC cannot be a brokerage or carry out brokerage functions itself (such as holding client funds in trust);
• The only remuneration received by the PREC for trading in real estate is from the brokerage;
• The Controlling Shareholder may only receive remuneration for trading in real estate from the brokerage or the PREC; and
• There is a written agreement between the Controlling Shareholder, the PREC and the brokerage governing the relationship between the parties.

Naming the PREC

There are no special restrictions on what the Controlling Shareholder may name the PREC. The name of the PREC must still adhere to the general naming requirements set out in the Ontario Business Corporations Act, namely the requirement that the name chosen must: contain a mandatory corporation term (e.g. Inc., Corp., Ltd.); be distinctive (i.e. to distinguish from other businesses); and not cause confusion (i.e. by being too similar to another business name). Despite no obligation to do so, a Controlling Shareholder may consider a name for the PREC that identifies the Controlling Shareholder and confirms its nature as a PREC, for example “[John Smith] Personal Real Estate Corporation.”

Remuneration

The Regulation provides that a brokerage may only direct remuneration to the PREC if: the PREC is exempt from registration; the Controlling Shareholder of the PREC has earned such remuneration; and the brokerage has confirmed in writing that the PREC criteria (set out in the Regulation, section 3.1) have been met.

Once the PREC is set up in accordance with the outlined criteria, and the required agreement between the Registrant, PREC and the brokerage is signed, the Controlling Shareholder must provide the legal name of the PREC and its address for service to RECO. It must do so before the PREC receives any remuneration from the brokerage.

Liability

As is typical of professional corporations under other professional regulatory regimes, the Controlling Shareholder is not exempted from personal liability by virtue of incorporation. Rather, the Controlling Shareholder is solely responsible for managing and monitoring the activities of the PREC to ensure that the PREC does not act as a brokerage, does not trade in real estate and does not otherwise perform an action for which registration is required.

Permitted Business Activities

Aside from the prohibition on trading in real estate and the requirement to deal with only one brokerage, there are no restrictions on the PREC’s business.  A  PREC may:

• carry on another business (e.g. property management and maintenance, or even something completely unrelated to real estate);
• invest in securities;
• purchase real estate, using debt or surplus funds; and
• own property and insurance policies

It is important however to consider the tax and other implications, such as liability insulation, of doing so.  There may be reasons to consider the use of a holding corporation, which the regulatory scheme does not prohibit.

Benefits of a PREC

The lack of restrictions on the business activities that may be carried on by the PREC, including the ability to invest surplus funds, provides the Controlling Shareholder with access to many potential benefits, including:

• Tax deferral (allows for a portion of a Registrant’s business income to remained in the PREC and defer tax payments on same);
• Income splitting (allows for a Registrant to pay dividends to family members who hold shares in the PREC);
• Flexibility of remuneration (access to payment options such as salary, dividends and bonuses);
• Lifetime capital gains exemption (“LCGE”) (affords the Registrant the potential to sell their practice on a tax exempt basis, up to the LCGE limit [presently $800,000.00]);
• Pooling of all business income from various sources (to increase opportunities for pooled investment); and
• Other tax and estate planning opportunities.

Is a PREC Right for You?

A PREC may not be right for every Registrant.  It will depend on your individual personal, family and business circumstances and goals.  You should discuss with your financial advisor, lawyer and accountant whether incorporating a PREC may be advantageous to you.  Some considerations to inform this decision include:

• Do you earn more than you need to cover your living expenses?
• Do you have plans to pass on or sell your business to a practicing family member or other Registrant?
• Do you have significant expenses that are only partially deductible or not deductible at all?
• Are you interested in saving more for retirement?
• Would you potentially benefit from allocating business income amongst family members?

Associated Costs

A PREC will be subject to several standard corporate filing obligations, and associated filing fees, on an ongoing basis.  There will also be corresponding professional fees on account of tax and legal advice received in conjunction with initial setting up the PREC and ongoing maintenance of same to consider.

Initial set up costs may include:

• a fee to file Articles of Incorporation under the Ontario Business Corporations Act.  It is recommended that professional legal and accounting guidance be obtained in the setup and registration of same, which will incur additional professional fees.
• professional fees involved with preparing and advising on:
  • initial corporate notice filings, by-laws, organizational resolutions and a virtual minute book;
  • employment documentation between the Controlling Shareholder and the PREC;
  • purchase agreement and ancillary documentation to roll assets into the PREC;
  • establishment of discretionary family trust(s), as required (as shareholder of the PREC);
  • incorporation of a holding company, as required (as shareholder of the PREC); and
  • mandatory agreement provided by brokerage (between brokerage, PREC and Controlling Shareholder)

Ongoing costs may include:

• annual corporate return filing fees. The filing fee is nominal, but if legal or accounting professionals are utilized to file same, there will be additional professional fees to consider.
• annual tax return filing fees and associated professional fees for accounting advice and support in relation to same.

We can help!

If you are ready to begin the discussion to determine whether or not a PREC may be the right choice for you and your real estate practice, please reach out to one of our PREC team members set out below:

David Tang, Partner
416.597.6047
dtang@millerthomson.com

Raymond G. Adlington, Partner
519.931.3545
radlington@millerthomson.com

Samantha Santos, Associate
519.593.3369
ssantos@millerthomson.com

Julia Zanetti, Associate
519.931.3510
jzanetti@millerthomson.com

Katherine Cavan, Associate
519.780.4637
kcavan@millerthomson.com

Robert Graham, Associate
519.780.4645
rgraham@millerthomson.com

DISCLAIMER. The enclosed information is provided for general information purposes only and is not to be relied upon as legal advice.  Appropriate financial planning, tax and legal advice should be sought in relation to your individual circumstances to determine if a PREC is the right choice for you.