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Personal real estate corporations(PREC) is new legislation, enacted in recent years, offers realtors the opportunity to operate their businesses under a personal corporation.
A PREC is a type of personal corporation that allows real estate agents and brokers in Canada to conduct their business operations through a separate legal entity.
Before the introduction of PRECs, most real estate agents operated as sole proprietors, meaning their finances and personal assets were not separate from their professional activities.
With the incorporation of a PREC, real estate agents can now establish a distinct legal entity for their business. This new structure offers various advantages, including tax benefits and limited liability protection, similar to other incorporated businesses.
1. Tax Benefits :
One of the primary reasons real estate agents consider incorporating a PREC is to access potential tax advantages.
A PREC allows agents to defer a portion of their income tax, potentially reducing overall tax burden.
For example any net income over $500,000 in a PREC is taxed at a lower rate 26.5% compared to personal tax rate (53.53%).
2. Limited Liability Protection :
By operating through a PREC, real estate agents can protect their personal assets from business-related liabilities. In case of legal claims or debts against the corporation, personal assets of the agent are generally shielded.
3. Income Splitting :
Another benefit of PRECs is the ability to split income among family members, if structured correctly. By paying salaries or dividends to family members involved in the business, the agent can effectively allocate income and potentially reduce the overall tax burden.
To set up a PREC in Canada, real estate agents need to follow specific steps, which include:
File the necessary documents and pay the incorporation fees to create the PREC. Legal and accounting costs associated with incorporation typically range from $1000 to $2500.
PRECs are governed by the Business Corporations Act in the province where the real estate agent operates. Compliance with these regulations is important to maintaining the corporation’s legal status.
Seek advice from a qualified income tax accountant to ensure proper tax planning and compliance with CRA guidelines.
