To incorporate or not to incorporate: Key considerations for real estate agents
The Real Estate Services Act (the “Act”) came into force on January 1, 2022. On the same day, the Real Estate Services Regulation (the “Regulation”) also came into force. The Act and the Regulation contain many changes to the way real estate services are provided by professionals in Manitoba. In particular, the Regulation creates and sets forth the requirements for real estate agents to incorporate and register their business to form a Personal Real Estate Corporation (PREC). The requirements are similar to those for other professionals but include their own unique aspects.
Requirements to Incorporate
In order to be eligible to be registered to provide real estate services, a PREC must be incorporated, formed by amalgamation or continued under The Corporations Act (Manitoba) and be in good standing under that Act. The Regulation contains the concept of a “controlling individual” with respect to the corporation, who is the sole voting shareholder of the corporation. This individual will be the professional registered to provide real estate services, for instance a real estate agent, who is incorporating their business. PERCs must meet the following requirements:
- the name of the corporation must consist of the name of its controlling individual, or a recognizable short form of that name, followed by the words “personal real estate corporation”
- all voting shares must be legally and beneficially owned by the corporation’s controlling individual
- the corporation may have other shares in its capital stock, but they can only be legally and beneficially owned by either the corporation’s controlling individual, a spouse, common-law partner or child of the controlling individual, or by a corporation whose capital stock is legally and beneficially owned by anyone of these individuals
- the corporation’s controlling individual must be the president of the corporation and its only director
The corporation’s controlling individual must also be registered under the Act, or alternatively may register at the same time as the corporation. Likewise, the corporation must be registered in the same registration category or categories as its controlling individual. Accordingly, each registration is automatically suspended if the registration of the other party, being the corporation or the controlling individual, is suspended.
One unique feature of PRECs is that the brokerage by which the corporation's controlling individual is engaged, or on whose behalf they intend to provide real estate services, must give consent to the application. In practice, when a real estate agent has already been engaged by a brokerage, they must obtain its consent to the registration of the corporation. Otherwise, an agent who has not been engaged by a brokerage yet must obtain the consent of the brokerage who intends to utilize the services of the corporation.
Finally, neither the corporation nor any of its shareholders can be subject to a unanimous shareholder agreement as defined in The Corporations Act, nor can be part of any agreement or proxy that vests a voting right attached to the voting shares of the corporation in a person other than the controlling individual of the corporation.
How does a PREC provide real estate services?
A personal real estate corporation may provide real estate services, which the Act defines broadly as meaning: (a) trading services; (b) property management services; (c) private sale services; or (d) another service in respect of real estate that is prescribed by the regulations under the Act. The Regulation establishes a list of registration categories. As noted above, the corporation and the controlling individual must register in the same category or categories. The categories are: (a) real estate salesperson; (b) real estate associate broker; (c) real estate broker; (d) property management representative; (e) property management supervisor; (f) property management manager; (g) private sales salesperson; (h) private sales associate broker; (i) private sales broker; (j) restricted brokerage salesperson; (k) restricted brokerage associate broker; (l) restricted brokerage broker.
It is advisable that the brokerage and the PREC enter into a written agreement to formalize their association. Further, the PREC and the controlling individual should also have a written agreement for the performance by the latter of real estate services on behalf of the corporation. The agreement should indicate that all the revenue received from providing real estate services will go to the corporation.
The corporation must also meet the following conditions when providing real estate services in Manitoba:
- the services must be limited to those that can be provided under the registration category or categories of the corporation and its controlling individual
- only the corporation’s controlling individual can provide these services
- the corporation’s controlling individual must exclusively provide the real estate services provided by the corporation (the controlling individual cannot engage in those services individually outside of the corporation) and
- the services must be provided only on behalf of the brokerage by which the corporation is engaged
A PREC may engage other individuals (for example, as employees or contractors) as long as they do not provide real estate services on its behalf. However, any other individual engaged by a PREC cannot be registered under the Act. A consequence of this restriction is that spouses who are both registrants under the Act will not be able to provide real estate services through a single PREC as they will each need to have their own corporation. On the other hand, a family member who is not a registrant under the Act could be employed in the business.
When thinking about creating a PREC, a real estate professional must consider that the corporation is subject to restrictions concerning the business that it may carry on. Essentially, the only business a PREC can participate in is that of providing real estate services on behalf of the brokerage that the registrant is engaged by. It cannot be used to conduct any other form of business.
The fact that the controlling individual of a PREC is providing real estate services on behalf the corporation and a brokerage does not affect the controlling individual's liability and obligations under the Act and the Regulation. Hence, when engaged in providing real estate services through a PREC, a controlling individual must still hold liability insurance.
Do you already have a corporation?
A real estate professional may have already incorporated, and they have been directing commissions from their brokerage to the corporation. It will be possible for them to use their existing corporation to provide real estate services, but the corporation now needs to comply with the rules for PRECs.
An existing corporation will have to meet all the requirements contained in the Regulation. It can be achieved by amending the Articles of Incorporation, modifying the corporate structure and obtaining consent from the brokerage by which the corporation's controlling individual is engaged, or on whose behalf they intend to provide real estate services. The corporate restructuring is a necessary step to be undertaken prior to obtaining registration under the Act to provide real estate services.
Benefits of incorporating
- Distinct legal entity. The corporation is a separate legal entity distinct from the registrant, but it is important to note that registrants are not shielded from professional responsibility through the corporation.
- Tax deferral and small business deduction. The earnings of the corporation are taxed at a corporate tax rate, which is significantly lower than the taxes paid by an individual, particularly when the corporation is eligible for small business deduction, with a low corporate tax rate applicable to the first $500,000 earned by the corporation. Further, after taxes are paid, any remaining money can be left in the corporation and paid out, as salary or dividends, at any point in the future, for instance when you are expecting to earn less and consequently fall into a lower income tax bracket.
- Retirement planning. The after-tax dollars kept in the corporation can be used to fund retirement plans, including through tax deferral and by withdrawing money during retirement when you are falling into a lower tax bracket, or by purchasing life insurance or investments.
- Income splitting (in limited cases). Family members are allowed to own non-voting shares in the PREC. Although the “Tax on Split Income” (“TOSI”) rules under The Income Tax Act (Canada) require dividends paid to family members to be taxed at the highest marginal tax rate, there are several exceptions. One of those exceptions applies to a family member who is working in the business on a regular, continuous and substantial basis (either on a deemed or factual basis). The family member will be then taxed based on their own applicable graduated tax rates when receiving dividends from the corporation. It is important to remember that the family member cannot be a registrant and cannot be performing real estate services requiring registration.
- Limited use of business losses. When providing services through a corporation, you will be able to use corporate losses to offset future corporate business income. However, you will not be able to claim business losses against any personal income and cannot access them immediately, as they are absorbed by the corporation.
Drawbacks of incorporating
- Administration costs and requirements. Incorporating comes with some additional costs. There are legal fees and administrative fees that go with the incorporation process. Further, every year the corporation must file annual returns with the Companies Office. Both you and the corporation must obtain and maintain a valid license to provide real estate services.
- Formalities. It is good practice for the corporation to have agreements in place with the brokerage and with the controlling individual.
- Taxation. Corporate taxes can be complex. The corporation will have higher accounting expenses compared to an individual, as the financial statements and tax returns of a corporation usually require the assistance of professional accountant.
- Limited activities. A PREC is allowed to provide only real estate and related services in accordance with the registrations of the corporation and the controlling individual. This restriction may greatly limit the activities that you can undertake in order to benefit from the incorporation of your business.