On January 1, 2009 British Columbia became the first province in Canada to allow licensed realtors to incorporate using Personal Real Estate Corporations (“PRECs”). Prior to January 1, 2009, real estate licensees did not have access to the benefits of incorporation that are available to other professionals such as lawyers and accountants. For the past six years however, real estate licensees have been provided with the opportunity to reap the benefits of incorporating their real estate practice.

Before jumping ahead and filing an incorporation application, it is important to note that PRECs are not for everyone and the benefits will not be realized unless the licensee’s financial position calls for it. It is strongly advised that each licensee obtain professional accounting and legal advice specific to their situation prior to making an application. This article will help you get started with the decision making process of whether to pursue a PREC.

Like any corporation, a PREC is treated as a separate legal entity from its owner. This provides several advantages, each of which may individually be the driving purpose behind a licensee’s intention to incorporate.

While a PREC receives the same tax and income splitting benefits of a corporation, it does not receive the same protection from liability. Typically, when we think of a corporation, we think limited liability. Limited liability can shield owners of a corporation from personal liability in situations where the company becomes liable for a wrongful act. However, being a real estate licensee comes with specific responsibilities. The Real Estate Services Act and the Real Estate Services Regulation place various duties and obligations on licensees with respect to their clients. The status as a PREC does not displace those duties and obligations. As a result, a licensee will remain personally liable for any negligent performance of their services.

The change in legislation to allow PRECs was designed to provide the real estate industry with tax planning advantages.

Since a PREC is a personal corporation, the position of sole director and sole voting shareholder is reserved for the licensee only. That person is known as the “controlling individual”. For the purpose of income splitting, non-voting shares may be owned by an “affiliated person” of the controlling individual. An affiliated person is defined in the regulation as:

(a)    a spouse of the controlling individual,

(b)   a child of the controlling individual,

(c)    a corporation, all of the shares of which are beneficially owned by one or more of the controlling individual and his or her spouse or child, or

(d)   a trust, all of the beneficiaries of which are one or more of the controlling individual and his or her spouse or child.

Once an affiliated person owns shares within the PREC, they are entitled to share the profits through dividends. By having the option of splitting the PREC’s income amongst the licensee’s immediate family, each family member may be taxed at a lower marginal tax rate, as opposed to a higher rate if the licensee received all of the income directly. This can be a beneficial strategy if the licensee is the sole provider for his or her family.

There is no question that a real estate licensee’s salary is cyclical. The benefit of incorporating allows the PREC to retain some of its income, and in those high income-earning years when a licensee earns more than he or she needs to spend, it may be a good idea to do just that. In short, rather than the brokerage paying the licensee his or her commission directly, the brokerage pays the commission to the PREC, which is controlled by the licensee. Out of that commission, the licensee can decide how much to pay out of the PREC and to whom. In some cases, income may be left in the PREC to be taken out and taxed on in future years.

This allows the licensee to control his or her yearly personal income and in turn, the rate at which he or she is being taxed. Further, the income that is left within the corporation is taxed at the corporate tax rate, which is much lower than even the lowest personal tax rate. While a licensee will be taxed again when dividends within the PREC are distributed, the combined corporate tax and tax on dividends often ends up being less or roughly equal to the personal income tax rate. Again, this benefit will vary depending on the licensee’s specific situation and the amount of dividend distribution.

In order to obtain the benefits of a PREC, the licensee’s level of income must justify it. On top of the costs associated with getting started, there are annual costs for corporate income tax returns as well as annual maintenance costs. In addition, the real estate licensing fees that are paid for to run the personal business would have to be paid twice; once for the licensee and once for the PREC.

Another limitation to be aware of relates to rules associated with naming and advertising the PREC. There are also limitations on the business that can be carried out through the PREC. Services must strictly be limited to real estate services and nothing else. This means that the licensee cannot use the corporation to trade in stocks, engage in the business of real estate development, or hold real estate beyond what is required for providing real estate services.

A lawyer will be able to explain all of the costs associated with PRECs and help ensure that the licensee is aware of these rules. Despite some of these costs and limitations, incorporating can prove to be extremely beneficial for many licensees. Before making your decision, do not hesitate to contact any of the lawyers in the corporate group at Touchstone Law Group LLP to explore whether a PREC is the right decision for you.

Author: Conor Zokol (Articling Student)

This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your real estate needs, please contact out office at (250) 448-2637 or any of our lawyers practicing in the areas of real estate at the following:

Una Gabie: una@touchstonelawgroup.com

Jennette Vopicka: jennette@touchstonelawgroup.com

Danielle (Dani) Brito: danielle@touchstonelawgroup.com