Good News for Ontario’s Real Estate Professionals

Posted October 9, 2020 Category: Businesses, News & Updates
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Good news for Ontario’s real estate professionals. They can now incorporate professionally.

In addition to providing certain legal liability protections to its professional shareholder (other than liabilities arising from professional negligence or misconduct), a personal real estate corporation (or “PREC”), if structured properly and depending on the personal financial and tax situation of the shareholders, allows for real estate brokers and agents to take advantage of potential tax deferral opportunities and access the lifetime capital gains exemption in the event of sale of shares to a third party.

Although technical amendments were made in March 2020 to the Real Estate and Business Brokers Act (Ontario) (soon the Trust in Real Estate Services Act, 2020) (the “Act”), the regulations prescribing the requirements for PRECs were only recently passed on October 1, 2020 clarifying the rules and requirements for PRECs.

Under the new regulations, PRECs must meet the following conditions:

  1. The PREC must be incorporated or continued under the Ontario Business Corporations Act (“OBCA”) and all of the equity shares (i.e. voting shares) of the PREC must be legally and beneficially owned, directly or indirectly, by the controlling shareholder.

  2. The sole director and president of the PREC must be the controlling shareholder.

  3. Each non-equity share (i.e. non-voting) of the PREC must be:

    i. legally and beneficially owned, directly or indirectly, by the controlling shareholder; or

    ii. legally and beneficially owned, directly or indirectly, by a family member of the controlling shareholder, or

    iii. owned legally by one or more individuals, as trustees, in trust for one or more children of the controlling shareholder who are minors, as beneficiaries.
  1. There must be no written provision by agreement or otherwise or arrangement that restricts or transfers in whole or in part the powers of the sole director to manage or supervise the management of the business and affairs of the PREC.

Under the regulations, “controlling shareholder” means the broker or salesperson who is employed (including as an independent contractor) by a brokerage to trade in real estate and “family member” means the controlling shareholder’s spouse, child or parent.

In addition, PRECs must meet the following criteria to be exempt from registration before it receives remuneration from a brokerage for trading in real estate (i.e. sales commissions):

  1. The PREC’s controlling shareholder must be employed (including as an independent contractor) by a brokerage to trade in real estate and must not receive, directly or indirectly, remuneration for trading in real estate from any person or entity other than the PREC or the brokerage.

  2. The PREC must not carry on the business as a brokerage or trading in real estate other than providing the services of its controlling shareholder to the brokerage.

  3. The PREC and its controlling shareholder, its non-equity shareholders, its employees, or its agents may not represent to the public in any manner, directly or indirectly, that the PREC carries on the business of trading in real estate.

  4. The PREC must not receive, directly or indirectly, remuneration for trading in real estate from any person or entity other than the brokerage.

  5. The PREC must not, on behalf of the brokerage, directly or indirectly hold any money or other property of a client, customer, or another person in connection with trading in real estate.

  6. The PREC, its controlling shareholder, and its controlling shareholder’s brokerage must enter into a written agreement which:

    a) governs the relationship between the brokerage, the PREC, and its controlling shareholder;

    b) requires the PREC to agree not to:

    i. hinder or obstruct the brokerage or its broker of record in the performance of their duties under REBBA and its regulations

    ii. hinder or obstruct the controlling shareholder in the performance of the shareholder’s duties under REBBA and its regulations; and

    c) requires the PREC to agree to:

    i. provide whatever assistance may be reasonably necessary to enable the brokerage and its broker of record to comply with their duties under the Act and its regulations and to enable the brokerage and its broker of record to ensure that the controlling shareholder is complying with the shareholder’s duties under the Act and its regulations; and

    ii. provide whatever assistance may be reasonably necessary to enable the brokerage to determine whether the conditions set out in this section are met.

    Brokers and agents should confirm with their brokerage (before incorporating a PREC) that the brokerage will agree to enter into a written agreement that meets the requirements set out above and should also confirm whether the brokerage has its own form of a written agreement it prefers to use.

Of additional note:

  1. The amount of remuneration the PREC pays its controlling shareholder cannot exceed the amount of remuneration received from the brokerage and which the brokerage would have otherwise paid directly to the controlling shareholder.
  1. Although the controlling shareholder is required to be registered with the Real Estate Council of Ontario (“RECO”, the regulator for Ontario’s real estate professionals) and work for a brokerage, there is no requirement for the PREC itself to be registered or authorized by RECO to receive remuneration from a brokerage on behalf of its controlling shareholder. However, written notice to RECO of the legal name and address for service of the PREC is required before the PREC may accept any remuneration from the brokerage.
  1. The PREC cannot have two or more controlling shareholders. This means, for example, that two realtor spouses cannot incorporate and hold equity shares in one PREC; separate incorporation by each spouse, in this case, would be required.
  1. Unlike the case for most professional corporations, there is no requirement to include the term “personal real estate corporation” as part of the PREC’s corporate name. However, it should be noted that OBCA corporate name requirements continue to apply and, as outlined above, the chosen corporate name should not imply that the PREC is in the business of trading in real estate.  
  1. An existing corporation may be used as a PREC as long as it meets the requirements for PRECs and is incorporated or continued under the OBCA.
  1. Holding corporation structures are permitted for PRECs except that if a holding corporation owns equity shares in the PREC, it may only do so as long as all of the equity shares (i.e. voting shares) of such holding company are owned by the registered salesperson or broker.
  1. Trusts are not permitted to hold equity shares given that the controlling shareholder must both legally and beneficially own all the equity shares.
  1. Consideration should be given as to whether to include, in the articles of incorporation, an option in favour of the controlling shareholder or the PREC to purchase/redeem any non-equity shares by family members at a pre-determined value.

As we always do, we recommend clients work with us and their financial, accounting, and tax advisors to determine if incorporating a PREC is right for them and to ensure a corporate structure that will meet with current and anticipated future planning needs in mind.

If you wish to discuss further whether incorporating a PREC is right for you, feel free to contact us.

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Posted October 9, 2020 Category: Businesses, News & Updates

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