Should you set up a personal real estate corporation (PREC)?


A personal real estate corporation, or PREC, allows a real estate agent to earn their business income through a corporation. Several o provinces, including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Nova Scotia and, most recently, Ontario, allow PRECs.

Several other professionals in Ontario, like doctors, dentists, lawyers, accountants, social workers, engineers and architects, can also establish professional corporations.

A PREC should not be confused with a corporation set up by a real estate investor to own real estate. A personal real estate corporation is only for a real estate agent.

Real estate investors may not benefit from setting up a corporation to hold their real estate investments. An example of when incorporation makes sense is if someone has an existing corporation with accumulated savings they want to invest in real estate. Or an investor who wants to buy and sell real estate—flipping properties—may benefit from a lower tax rate on this corporate business income. Some other scenarios may include investing in commercial real estate or establishing a not-for-profit corporation as part of a family cottage succession plan. I have written recently about whether you should buy real estate through a corporation. 

Tax deferral, not tax savings

Getting back to PRECs, whether a realtor should incorporate depends on their circumstances.

One of the primary benefits to incorporation for a realtor, or anyone else, is the ability to defer income tax. The tax rate on small business income up to $500,000 in Ontario is 12.2%, and comparable in other provinces. Profit left in a PREC generally qualifies for this low rate of tax. By comparison, personally earned income at $50,000 in Ontario is taxed at 29.65%; at $100,000, it’s 43.41%; $150,000 at 44.97%; $200,000 at 48.19%; and over $220,000 at 53.53%.

So, for a high-income Ontario realtor, incorporation could result in tax deferral of up to 41.33%, based on the top personal rate of 53.53% less the corporate small business rate of 12.2%. Note that I use the term tax deferral, not savings, as eventually personal tax becomes payable to withdraw accumulated corporate savings. After-tax profits in a corporation can be paid out as a dividend at rates ranging from 0% up to 47.74%, depending on the recipient’s other income for the year.

Income splitting with family members

Ontario realtors can name family members as shareholders of their PREC as well, but the realtor must own all voting shares of the company. Non-voting shares can be issued to others, and dividends can be paid to them. However, under Tax on Split Income (TOSI) rules that have applied to all Canadian private corporations since 2018, most dividends paid to family members will be considered split income and taxable at the top tax rate, negating the income-splitting benefits.

Two primary exceptions to these punitive TOSI rules are if the realtor is over the age of 65, regardless of their spouse’s age, or if their spouse works more than 20 hours per week in the business over the course of the year.

If a realtor can establish a PREC and accumulate savings inside the corporation, those savings can be invested in stocks, bonds, GICs, mutual funds, ETFs or even investment real estate.

Tax deductions

Most expenses that are tax deductible to an unincorporated realtor operating as a sole proprietor will also apply for an incorporated realtor. As a result, a PREC will not likely result in the ability to claim more tax deductions.

There are a couple unique exceptions. One is the ability to set up a Health Spending Account (HSA). HSAs allow an incorporated business owner to be reimbursed for personally incurred medical expenses without the withdrawals being treated as taxable income.

Another exception is for corporate-paid retirement counselling. According to the Canada Revenue Agency, “the fees you pay to provide services such as financial counselling or income tax preparation for an employee are usually considered a taxable benefit.” However, “employee counselling services are not taxable if they are for…an employee’s retirement.”

PRECs will have additional costs. Incorporation costs with a corporate lawyer may range from $1,000 to $3,000. Annual bookkeeping and accounting costs could cost an incremental $1,000 to $3,000 over and above a realtor’s current bookkeeping and accounting costs.

Bottom line

So, should you set up a PREC? Tax deferral is the main benefit, followed by income splitting for those who can pay dividends from their PREC without being subject to the TOSI rules. 

There may be other potential benefits of personal real estate corporations for some realtors. Realtors should seek tax and financial advice about the potential benefits of incorporation.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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