The Trust in Real Estate Services Act, 2020, S.O. 2020, c. 1 – Bill 145 (“TRESA”), formerly known as the Real Estate and Business Brokers Act (2002), was passed by the Ontario legislature on February 28, 2020 and received Royal Assent on March 4, 2020. In a press release, dated October 1, 2020, the Ontario government announced the first phase of regulatory changes related to TRESA which modernize rules for registered real estate brokerages, brokers, and salespersons across the province while also addressing consumer concerns.
The first phase includes regulations that more closely align real estate brokerages and professionals with modern business practices including the ability for professionals to incorporate and be paid through Personal Real Estate Corporations (“PRECs”).
What is a Personal Real Estate Corporation?
A PREC is a form of business incorporation that allows real estate professionals to obtain the same tax and income benefits that other entrepreneurs enjoy. This is a significant opportunity for real estate agents and brokers, who have previously been denied the same tax-saving and other advantages that realtors in other provinces such as British Columbia, Quebec, Manitoba, Saskatchewan, Alberta, and Nova Scotia have all enjoyed for years.
What are the Benefits of Incorporating a PREC?
The PREC model for realtors is flexible and agents or brokers who use a PREC may be able to:
- Achieve tax deferrals;
- Benefit from the Lifetime Capital Gains Exemption for shares of a qualified small business corporation;
- Benefit from Income splitting options; and/or
- Utilize holding corporations to own and manage their other investment and business activities along with their core real estate trading activities.
Of course, incorporation does come with some up-front expenses and increased obligations such as the requirement to keep up with annual filings as well as more stringent legal regulations. Moreover, it is important that real estate agents and brokers considering incorporation plan strategically, and in advance, to ensure they do not inadvertently disentitle their PREC from one or more of the above-noted tax advantages. The guidance of a knowledgeable business lawyer can help to maximize the benefits of incorporation while limiting risk and minimizing tax burden.
The duties and obligations of real estate agents and brokers will apply regardless of whether real estate services are being provided by an individual or through a PREC. Realtors will not benefit from limited personal liability when operating through a PREC under TRESA as would typically apply to a shareholder in a standard corporation.
Future Regulatory Developments
The Ontario government announced that the second phase of regulatory developments, expected later this fall, include public consultations with consumers and real estate professionals that focus on additional measures to support a high level of ethical standards in the real estate sector, including:
- Updating and modernizing the Code of Ethics for real estate professionals;
- Implementing disclosure requirements to better protect consumers; and
- Improving regulatory efficiency and enhancing professionalism in the industry by updating the authority and powers of the Real Estate Council of Ontario.
If you have business law questions, including questions about business formation and organization and business operations , or whether a Personal Real Estate Corporation is right for you, contact the knowledgeable business lawyers at Mills & Mills LLP at 416-863-0125 or via email.