PREC – Personal Real Estate Corporations
A new and amended regulations to the Real Estate and Business Brokers Act, 2002 (REBBA) has been released by the Ontario Government. The new regulation deals with personal real estate corporations and gives real estate agents the ability to utilize the benefits of incorporation. Brokers and salespeople may also use this term in advertising and replace the term “commissions and other remuneration” with “remuneration.”
Benefits From PREC
The new legislation enables a brokerage to pay back remuneration to salespeople or brokers when trading in real estate to a corporation if certain criteria are met.
The corporation refers to a personal real estate corporation (PREC). A PREC is a corporation where salespeople and brokers establish to directly receive remuneration from a brokerage. Utilizing PREC may bring financial benefits to salespeople or brokers.
The new rules do not require using a PREC.
Do I Have To Register The RECO To Have A PREC?
PREC does not require registering under REBBA and is allowed to receive remuneration from a brokerage directly if all the required criteria are met and all the conditions required in the legislation are satisfied. A PREC is permitted to provide the services of its controlling shareholder (the salesperson or broker), but cannot trade in the real estate industry. But the salesperson and broker should continue being employed by the brokerage to trade in real estate industry and to have the PREC received the remuneration directly.
How Can I Decide Whether To Set Up A PREC Or Not?
There are advantages and disadvantages regarding creating and using of a PREC based on the personal circumstances of each registrant. It is advisable to consult financial and other professionals before to decide whether to set up a PREC or not. It is also vital to discuss with the broker or salesperson to ensure whether the brokerage is willing to enter into an agreement with the PREC. Brokerages are not allowed to do so.
What Should I So If Decide To Set Up A PREC?
Apart from seeking advice from financial and other professionals, as well as confirming with the brokerage that the individual is willing to enter the PREC, the registrants also need to:
a. Make sure the criteria and conditions are met
b. Make sure the agreement among the PREC, the registrant and the brokerage including the required content required in the legislation
c. Provide the legal name and its address of the PREC on registration@reco.on.ca
Is A Real Estate Trust Account Needed For The PREC?
No. The PREC does not require a real estate trust account. The PREC is not allowed to deposit any money or other property associated with trading in real estate industry.
How Should I Name The PREC?
Corporations should make the business decision when forming or amending. The decision is made by the registrant. In order to choose a name and keep exempt from registrant, the registrant should consider that the PREC, the controlling shareholder and others should not represent to the public that the PREC trades in real estate industry.
Can My Team Receive Remuneration Via My PREC?
As the name suggested, only one registrant can be paid remuneration through a given PREC. Remuneration for team members must flow through the brokerage to the individual brokers or salespersons or their respective PRECs.
Can Married Registrants Own The Equity Shares Of The Corporation?
No. The PREC may only receive remuneration for only one individual registrant who own all the equity shares.
Can I Use The Name Of The PREC When Advertising?
No. A registrant must not represent to the public that the corporation engages in the business of trading in real estate industry.
If I Have A Corporation That Formed For Other Purposes, Can I Use It As A PREC?
A registrant may be eligible to use an existing corporation if certain criteria and conditions of a PREC are met. But there might be limitations for other types of registered businesses.
Is There Any Limitation Associated With The Activities That A PREC Engaged In?
The PREC provides the services of the controlling shareholder (broker or salesperson) to the brokerage, but it cannot trade in real estate. The activities that a PREC can engage in are restricted. Eligible activities are depending on the objectives of the corporation and there could be limitations on the corporation if it operates in another regulated sector.
Can I Change To A PREC After Setting Up A Brokerage?
Yes! But the brokerage needs to stop trading and its registrations are terminated. Registrants are encouraged to consult financial and other professionals to find out the best approach based on their personal circumstances. Meanwhile, all the criteria and all the conditions of a PREC need to be met. You should also follow the requirements to terminate the brokerage.
Does The Professional Liability Insurance Program Conducted By RECO Cover A PREC?
No. A PREC is different from a registrant, so it is not protected by the insurance program. The program cannot protect or indemnify a registrant related to any claim made against a PREC, but it does not affect the coverage afforded to the registrant.
Can Commission Protection Cover Unpaid Remuneration To A PREC Under The Professional Liability Insurance Program Conducted By The RECO?
If the remuneration owned to a PREC is failed to be paid, a claim under the insurance program could be arisen by the registrant. The program can protect you in the activities such as brokerage theft, fraud, insolvency, or misappropriation of funds.
Is A Holding Company Eligible To Own Shares Of A PREC?
The legislation allows that all the equity shares of the corporation be legally and beneficially owned by the controlling shareholder either directly or indirectly. Also all the non-equity shares must be owned by a family member directly or indirectly. The family member is required to be a spouse, child, parent, or a trust for a minor child. The business decision that whether shares are held directly or indirectly by the controlling shareholder or its family member should be made by the registrant when setting up the PREC. You are also encouraged to seek legal advices from experts to ensure the alignment with the law.
How Can I Notify The RECO (Registrar) About The PREC?
You can send an email to registration@reco.on.ca with the name of the controlling shareholder (registrant), the legal name of the PREC and the PREC’s address for service.
When Can The PERC Receive The Payment Of Commissions? Can A Brokerage Pay The PREC Commissions Earned Before October 1, 2020? Can A Deal Conduct Before The PREC Requirement Coming Into Effect But Terminated After October 1?
The REBBA and taxation should be taken into consideration.
Under REBBA, the brokerage is required to pay the remuneration to an eligible PREC since the registrant is entitled to the remuneration.
It is advisable for salespeople and brokerages to consult their accountant and corporate lawyers regarding when and how to report earnings for a PREC.
Is There Any Limitation Or Guidelines Regarding Naming A PREC?
REBBA does not have requirements for naming a PREC. But since the PREC cannot be advertised or promoted for trading in real estate, the name that suggests or implies it is a brokerage is not allowed. Another requirement is that the PREC must be registered in Ontario, or continued in Ontario, if it is incorporated outside of Ontario.
Is The PREC Eligible For Holding Real Estate?
Yes! REBBA does not prevent corporation from holdings of a PREC. But there are limitations if the PREC is used in another regulated sector.
Is There Any Requirement For Additional Insurance Since The PREC Is Not Covered By The RECO E&O Insurance? Will The Coverage Eligible To The Brokerage If The PREC And The Brokerage Are Sued But The Registrant Is Not?
The RECO E&O insurance program cannot cover a PREC since it is not a registrant. Like any other non-registrant corporation, a PREC should be protected from risks. A brokerage is a registrant that is protected under the RECO program.
Does The PREC Ask The Registrant To Confirm That The PREC Comply With All REBBA Requirements? Is There A Form That The Registrant May Be Required To Complete?
Registrants are required to inform the RECO regarding the name of their PREC and the address for service via email. Brokerage owners must make sure that the PREC complies with REBBA requirements, as well as that the RECO of the PREC is notifies by the registrant. The individual salesperson or broker must make sure that their own PREC complies with the REBBA, and the brokerage must make sure the PREC meets its obligations before paying any remuneration to a PREC. The brokerage must conduct due diligence and may ask the salesperson or broker to confirm compliance.
If A Registrant Uses Their Own Name For The PREC , Can The Registrant Continue To Do Advertise As Long As They Only Use Their Own Name Without Violating The Requirement
Of The PREC Of Not Eligible For Trading In Real Estate?
The salesperson or broker can do advertise since they use their own name, but it must include the brokerage name under the requirement of advertising. They cannot advertise under the name of the PREC.
Is A PREC Eligible For Purchasing And Owning Rental Properties?
A PREC is not limited for other businesses or income that it earns or holds. It is advisable to discuss the plans with an accountant and lawyer regarding other requirements for corporations.
Is A Holding Company Eligible For Owning Shares In A PREC? Is There Any Requirement For Registering As A PREC With Family Members Who Are Shareholders?
Holding corporation is not identified specifically under the legislation, but the potential shareholders of the PREC are defined as follows:
a. A individual controlling shareholder owns all equity shares (i.e. voting shares) and the individual is the sole director and officer of the corporation;
b. The individual is registered as a broker or salesperson;
c. The controlling individual’s family members (including spouse, children, and parents) can hold non-equity shares (i.e. non-voting shares) in the PREC.
It is advisable to consult your lawyer regarding structuring a PREC or holding corporation.
Is A Registrant Required To Take All Commission Through The PREC Or Part Of It Can Be Considered As Personal Benefit?
Under the legislation, a brokerage and registrant must determine the compensation structure and the terms in the agreement among the brokerage, the controlling shareholder (salesperson or broker) and the PREC
Are There Any Limitations Regarding Income Splitting?
Seeking advice from an accountant or lawyer is vital. It will help you understand the available alternatives and tax requirements in the operation.
Muhammad Nasrullah,CPA, CGA, LPA
Chartered Professional Accountant
Licensed Public Accountant
206A – 2365 Finch Ave. West North York, ON. M9M 2W8
Tel: (1) 416-748-0817 ext 101 Fax:(1) 416-748-6814
www.nasrullahcga.com E-mail: muhammad@nasrullahcga.com