To incorporate or not to incorporate: Key considerations for real estate agents

If you’re a real estate professional in Manitoba, you may have heard about the option to incorporate your practice through a Personal Real Estate Corporation, or PREC. Since the Real Estate Services Act and Real Estate Services Regulation came into force on January 1, 2022, this has been a viable option, but it comes with specific rules, meaningful benefits, and real trade-offs.

This article walks you through what a PREC is, how it works, and what to consider before deciding whether incorporating is right for you.

What is a PREC?

A PREC is a corporation through which a registered real estate professional provides real estate services. It must be incorporated under The Corporations Act (Manitoba) and must be in good standing. The agent who incorporates — called the “controlling individual” — must be the sole voting shareholder, the sole director, and the president of the corporation. In short, you run it, and you control it.

The corporation’s name must include your name (or a recognizable short form of it) followed by the words “personal real estate corporation.” Family members — a spouse, common-law partner or child — can hold non-voting shares, which opens up some income-splitting possibilities discussed below. However, all voting shares must remain with you.

How does a PREC operate?

A PREC can provide whatever category of real estate services you are personally registered to provide — whether that is trading services, property management, private sales, or another prescribed service. The corporation and the controlling individual must be registered in exactly the same category or categories, and both registrations rise and fall together: if one is suspended, the other is automatically suspended as well.

There are some important operational constraints to keep in mind:

• Only you — the controlling individual — can provide real estate services through the PREC. The corporation cannot engage other registered agents.
• You must provide those services exclusively through the PREC. You cannot simultaneously provide real estate services in your personal capacity outside of it.
• All services must be provided on behalf of a single brokerage. The PREC cannot work for multiple brokerages at once.
• The PREC’s business is limited strictly to real estate services. It cannot be used to run any other type of business on the side.

The PREC can employ or contract other individuals for non-real-estate tasks — administrative support, bookkeeping, and the like — but those individuals cannot be registered under the Real Estate Services Act. This means that if you and your spouse are both licensed agents, you cannot share a single PREC — each of you would need your own. A family member who is not a registrant, on the other hand, could work in the business.

One thing a PREC does not do is insulate you from personal professional responsibility. The corporation may receive the income from your services, but your obligations and liability under the Act remain yours. You still need to personally hold liability insurance.

Getting started: brokerage consent and written agreements

Before you can register a PREC, your brokerage must consent to the application. If you are already engaged by a brokerage, you will need to obtain that consent before proceeding. If you are not yet affiliated with a brokerage, the brokerage you intend to work through must provide its consent as part of the process.

Once the PREC is registered, it is advisable to have two written agreements in place: one between the PREC and the brokerage governing the terms of their association, and one between the PREC and you as the controlling individual, confirming that all real estate services revenue flows to the corporation.

Do you already have a corporation?

Some agents have already incorporated and have been directing commissions to their existing corporation. The good news is that you can use an existing corporation as your PREC — but it will need to be brought into compliance with the PREC rules first. This typically involves amending your Articles of Incorporation, adjusting the corporate structure, and obtaining your brokerage’s consent. That restructuring must be completed before the corporation can be registered under the Act.

Benefits of incorporating:

• Tax deferral and the small business deduction. A corporation pays tax at the corporate rate, which is significantly lower than personal income tax rates. Better still, if the corporation qualifies for the small business deduction, a low rate applies to the first $500,000 of active business income. After corporate taxes are paid, any remaining funds can stay in the corporation and be paid out to you — as salary or dividends — at a time when your personal income is lower and your tax rate is more favourable.
• Retirement planning. The after-tax dollars accumulated in the corporation can be used strategically to fund your retirement through investments, life insurance, or by drawing down funds during lower-income years.
• Income splitting (in limited circumstances). Family members can hold non-voting shares in the PREC, which means dividends can be paid to them. The “Tax on Split Income” (TOSI) rules under the Income Tax Act (Canada) generally require that dividends be taxed at the highest marginal rate, but there are exceptions. If a family member works in the business on a regular, continuous, and substantial basis, they can receive dividends taxed at their own (lower) graduated rates. Keep in mind that the family member cannot be a registrant under the Act or perform any services that require registration.
• Limited liability as a separate legal entity. The corporation is a distinct legal person, which provides some structural separation between the business and your personal assets. That said, this does not shield you from personal professional responsibility under the Act - professional liability follows you regardless of the corporate structure.
• Use of corporate losses. Losses incurred inside the corporation can be carried forward to offset future corporate income. The trade-off is that those losses stay inside the corporation; you cannot use them to offset personal income.

Drawbacks of incorporating

• Upfront and ongoing costs. There are legal and filing fees to incorporate, and every year the corporation must file annual returns with the Companies Office. You and the corporation must also each maintain valid registrations under the Act. These are real costs that should be weighed against the tax savings you expect to achieve.
• Accounting complexity. Running a corporation means maintaining separate financial statements and filing a corporate tax return each year — work that typically requires a professional accountant. Your overall accounting costs will be higher than if you were operating as an individual.
• Required agreements and formalities. To run the PREC properly, you will need written agreements with both the brokerage and yourself as the controlling individual. These are the mechanisms by which income flows correctly to the corporation.
• Restricted business activities. A PREC can only carry on the business of providing real estate services through its registered brokerage. If you have other business interests or income streams you had hoped to run through the same corporation, that is not permitted.

Conclusion

Incorporating as a PREC can be a powerful tool for tax planning, wealth accumulation, and long-term financial flexibility, but it is not a one-size-fits-all solution. Whether it makes sense for you depends on your income level, your family situation, your business goals, and how the ongoing costs of compliance stack up against the potential savings.

Whether you are considering incorporating for the first time or need to bring an existing corporation into compliance with the PREC requirements, our lawyers at Fillmore Riley LLP can help you work through the decision and get the structure right from the start.

Fillmore Riley LLP's Taxation Practice

We offer tax advice to both individual and business clients on a wide range of matters, including corporate and commercial transactions, estate planning, and tax dispute resolution and litigation. For more information or if you have any questions, please contact a member of the Fillmore Riley Taxation practice.