BC Realtors are currently having a banner year. Record prices and record sales equate to record income for realtors. Prior to 2009, realtors were forbidden to earn their income in the form of a corporation, which means they were barred from any tax saving opportunities available to Canadian controlled private corporations (CCPCs).
PREC: The Personal Real Estate Corporation, Corporate Tax Structure for BC Realtors
Since 2009, the Real Estate Council of British Columbia (RECBC) has allowed individual real estate licensees to form Personal Real Estate Corporation (PREC) to take advantage of the corporate tax structures available to other Canadian businesses.
Many BC Realtors have been contacting us in recent months to form Personal Real Estate Corporations. Before rushing into this decision, it is important for these realtors to fully understand the annual additional costs involved with forming a Personal Real Estate Corporation and the benefits of the tax savings using a corporate structure. BC realtors need to understand that a corporation only makes economical sense if the income is sustainable in the long run.
Additional Costs & Restrictions
In addition to the sustainability of income, there are additional costs and restrictions that come with forming a Personal Real Estate Corporation, including:
- PREC must pay for two sets of licensing fees, E&O fees, and Compensation Fund fees every two years.
- Accounting fees are much higher for a PREC since annual financial statements and a corporate tax returns must be filed with CRA for the PREC (in addition to the yearly personal tax return).
- Legal fees are incurred to maintain up to date filings with the BC Corporate Registry.
- Overall there is more paperwork involved with a PREC.
- RECBC restricts PREC to providing real estate services and those services which are subordinate to, and exist to support, real estate services. In other words, holding of real estate for rental or development purposes is not allowed within the PREC.
- RECBC restricts holding of a PREC’s voting shares to one licensee.
Many Benefits of a PREC
Despite these costs and restrictions, there are many benefits inherent in operating as a PREC as well, including:
- PREC benefits fully from the low corporate tax rate provided to all CCPCs. This means that all of the tax sheltering and income splitting opportunities are available to a PREC.
- RECBC’s restrictions on the shareholdings do not limit income splitting opportunities if the PREC is set up properly.
- A holding company can be inserted into the entire structure to allow for the tax free transfer of the PREC’s retained earnings to another corporation where the funds can be used for investments including real estate development.
The bottom line is as long as the licensee believes that their income as a realtor will continue to be as strong as the current year, forming a PREC allows for great tax benefits. With competent professional tax advice, RECBC rules can be met while enjoying the full tax benefits of income splitting and the reinvestment of retained earnings.