For many real estate agents, finding ways to grow their business, save on taxes, and keep more of their hard-earned money is a top priority. That’s where a “Professional Real Estate Corporation (PREC)” can come in. It’s a great tool for managing your finances and running your business more efficiently, but like any big decision, it’s not without its challenges. If you’re considering setting up a PREC Real Estate, this guide will help you understand the basics, look at an example from Ontario, and avoid five common mistakes people make when starting out.
Why Set Up a PREC Real Estate?
Here are some of the main reasons agents make the switch:
- Tax Savings: Corporations are taxed at a lower rate than personal income, which can help you save big.
- Income Splitting: You can pay family members (like a spouse or adult children) who are shareholders, lowering your overall tax bill.
- Deducting Expenses: Business-related costs, like office supplies or marketing, can be written off through your PREC Real Estate.
- Financial Flexibility: Retained earnings can be left in the corporation for future investments or growth.
5 Common Mistakes When Incorporating a PREC Real Estate
While a PREC Real Estate can be a game-changer, there are a few common mistakes that can derail your efforts. Here’s what to watch out for:
1. Not Getting Professional Advice
What Goes Wrong:
Some agents try to handle the setup process themselves or rely on bits of advice they find online. The problem? PREC Real Estate involves legal, tax, and regulatory details that aren’t always straightforward. One wrong step could cost you.
How to Avoid It:
Work with experts like Incorp Pro – professional corporate registry agency that knows the ins and outs of PRECs. They’ll make sure everything is set up correctly from day one and help you avoid costly mistakes. Save your time and incorporate your PREC Real Estate within the few business hours with Incorp Pro.
2. Ignoring the Rules
What Goes Wrong:
Every province has specific rules about how PRECs must operate. For example, in Ontario, a PREC must:
- Be controlled by a licensed real estate professional.
- Focus exclusively on real estate services.
Failing to meet these requirements can lead to penalties or even have your PREC shut down.
How to Avoid It:
Take the time to understand the rules in your province. If you’re in Ontario, this means following REBBA guidelines. A lawyer can ensure your PREC meets all the necessary criteria.
3. Assuming Tax Savings Are Guaranteed
What Goes Wrong:
Many people assume that incorporating automatically equals huge tax savings. But the truth is, without a proper plan, you might miss out on the full benefits—or worse, end up paying more.
How to Avoid It:
Talk to a tax expert who specializes in real estate. They’ll help you:
- Structure your salary and dividends.
- Plan for corporate and personal taxes.
- Stay on the right side of the Canada Revenue Agency (CRA).
4. Skipping a Business Plan
What Goes Wrong:
Starting a PREC is more than just a tax decision—it’s a big business move. Without a clear plan, it’s easy to lose sight of your goals or miss opportunities to grow.
How to Avoid It:
Treat your PREC like a business from day one. Write down your goals, map out how you’ll get there, and think about:
- How you’ll find and retain clients.
- What you want to achieve financially (short- and long-term).
- How you’ll invest any extra money in your PREC.
A solid plan will help you make the most of your corporation.
5. Mixing Personal and Business Finances
What Goes Wrong:
It might seem harmless to use your PREC’s accounts for personal expenses—or vice versa—but it can cause serious problems, from messy bookkeeping to audits.
How to Avoid It:
Keep everything separate. Open a dedicated business bank account and credit card for your PREC Real Estate, and use them only for business-related expenses. It’s also a good idea to work with a bookkeeper or accountant to stay organized.
Step-by-Step Guide to Incorporate a PREC Real Estate in Ontario
Step 1: Verify Your Eligibility
Before proceeding, ensure you meet the following criteria:
- Active Real Estate License: You shall have a valid license under the Real Estate and Business Brokers Act, 2002 (REBBA).
- Sole Purpose: The company has to exclusively render services in the sectors of real estate and those activities that are ancillary to it.
- Control: This requires that the real estate agent own all the voting shares and be the controlling shareholder of that agency.
- Some companies issue non-voting shares to family members for tax planning purposes, but any such issue must be made in conformity with the relevant rules.
Step 2: Naming your PREC
Your company name has to be within the set boundaries of naming conventions made by the REBBA. It usually includes:
- First name, middle name your full legal name-as it appears on your real estate license.
- A descriptor such as “Professional Corporation” or “Real Estate Professional Corporation”.
- For example, if your name is “Jane Doe,” your PREC name might be Jane Doe Real Estate Professional Corporation.
Step 3: Draft Articles of Incorporation
The Articles of Incorporation will document the form and function of your PREC. In Ontario they must be done using the rules established by the Business Corporations Act (Ontario) and REBBA.
Key elements to include:
- Business Purpose: “The business of the Corporation shall be limited to offering real estate services”.
- Share Structure: Highlight voting and non-voting shares.
- Restrictions on Activities: The company cannot operate outside real estate service provision.
It ensures compliance and avoids errors by hiring a legal professional to draft and review the articles.
Step 4: Filing the Articles of Incorporation
Provide the Articles of Incorporation, duly completed, to Ontario for filing by the Minister of Public and Business Service Delivery. You may file them online, by mail, or in person.
Required Documents:
- Articles of Incorporation – Form 1 under the Ontario Business Corporations Act.
- NUANS Report if name is unique (where applicable). Get your NUANS Reservation report.
- Fee: The incorporation fee also varies by jurisdiction, approximately $300 if filing directly with the ministry in Ontario.
Incorp Pro can incorporate a PREC in a few business hours and email the Articles and Certificate of incorporation to you.
Step 5: Prepare a Minute Book
A corporate minute book is the formal record of your corporation’s principal documents and activities. It includes:
- Articles of Incorporation.
- Company bylaws.
- Shareholder agreements.
- Minutes of meeting and resolutions.
This is a book that serves legal and compliance purposes. Many professionals outsource to a lawyer to help them organize the book.
Step 6: How to Register with the CRA
After incorporation, you will register with the CRA your PREC Real Estate for the required accounts including:
- Business Number (BN)
- HST Account: This will be required to collect and remit Harmonized Sales Tax.
- Payroll Account: If you plan to pay yourself or other employees a wage.
You can also register online using the CRA’s Business Registration Online service or by contacting the CRA directly. If you don’t want to spend the long hours on call with CRA, Incorp Pro can register the CRA accounts for you.
Step 7: Notify Your Brokerage
Inform your brokerage that your PREC Real Estate has been incorporated. Most brokerages will require:
- Copy of incorporation or Articles of Incorporation.
- Name and “registration particulars” of the PREC.
- Proof of compliance with the education requirements of REBBA. Commissions must go through PREC, so it is all the more necessary that the brokerage firm keeps them in the know.
Step 8: Opening a Corporate Bank Account
To properly manage the finances of your PREC real estate, make sure you go ahead to open a specific corporate bank account. It is into this account that the following will go.
- Receiving commissions.
- Paying business expenses.
- Issuing salaries or dividends.
Keep personal and corporate finances separate for transparency and to follow the rules.
Step 9: Create Your Compensation Plan
Decide how you will pay yourself from the PREC. The two main ways to do this are:
- Salary: Provides usual ways of having a regular income; the employee can contribute to the Canada Pension Plan.
- Dividends: The advantages are tax benefits and there are no CPP contributions; however, this also means no pension benefits.
- See a tax professional who can work with you in creating the best compensation strategy that fits your income and lifestyle and supports your financial goals.
Step 10: Maintain Compliance
Once your PREC Real Estate is up and running, stay in ongoing compliance by:
- Filing Annual Returns: File corporate tax returns with CRA file annual information returns with the Ontario government.
- Record Keeping: This involves keeping proper books of accounts and updating your minute book from time to time.
- License Renewals: Keep your real estate license current.
Example of a PREC in Ontario
Let’s consider “John Smith Real Estate Professional Corporation,” belonging to the licensed real estate agent John Smith. John routes all his commission income through the PREC and pays himself a combination of salary and dividends. His wife holds non-voting shares, enabling income splitting through which to reduce their household tax burden. In addition to the procedure above, John is now incorporated, enjoying all the tax benefits accruable and generally better financial management and professionalism that come with a Ontario PREC.
Final Thoughts
Setting up a PREC Real Estate can be a smart move for real estate agents looking to save money and take control of their finances. But it’s not something you want to rush into. By avoiding common mistakes and working with professionals, you can set yourself up for long-term success.
Have questions about PRECs or thinking of starting one? Let us know in the comments—we’d love to hear from you!