You had a good year.
Maybe a very good year.
Your commissions are growing, your tax bill is getting uncomfortable, and somewhere along the way another realtor, your accountant, your broker, or someone at the office told you:
“You should open a PREC.”
But should you?
The answer is not simply based on how much commission you earn.
In fact, one of the biggest mistakes we see is assuming that every successful realtor should incorporate as soon as their income reaches a certain number.
The better question is much more personal:
After paying for the life you want to live, how much of your income is actually left?
That is often where the PREC conversation should begin.
First, what is a PREC?
PREC stands for Personal Real Estate Corporation.
In Ontario, a PREC allows an eligible registered real estate salesperson or broker to have qualifying remuneration from their brokerage paid to a corporation rather than directly to them personally.
You still operate through your brokerage. A PREC does not become a real estate brokerage itself, and it does not replace your relationship with your brokerage.
Instead, think of it as a corporate structure around your real estate practice.
That structure can potentially create opportunities for tax deferral, compensation planning, investment and retirement planning, and better separation between your business and personal finances.
But none of that automatically means you need one.
The real question: Do you earn more than you need to live?
Suppose two Ontario realtors come to us.
Realtor A
Net real estate income: $300,000
Personal cash needed each year: $280,000
Potential amount left over: $20,000
Realtor B
Net real estate income: $225,000
Personal cash needed each year: $120,000
Potential amount left over: $105,000
Which realtor has the stronger case for incorporating?
You might assume Realtor A because they earn more.
But Realtor B may actually have the more interesting PREC opportunity.
Why?
Because incorporation becomes much more powerful when you earn money that you do not need to withdraw personally right away.
That is the part many incorporation conversations miss.
You do not incorporate just because you make a lot of money
There is no magic income level where every realtor should incorporate.
You may hear:
“Once you make $150,000, get a PREC.”
Or:
“If you make $200,000, you should definitely incorporate.”
We think those rules are too simplistic.
Someone earning $400,000 and spending almost all of it personally may have relatively little income available to retain inside a corporation.
Someone earning $200,000 and comfortably living on $100,000 may have a much greater opportunity.
So instead of asking:
How much do I make?
Ask:
How much do I make that I don't need right now?
That is a much better starting point.
Start with your real net income
Gross commission income is not the number we care about.
If you generated $350,000 of commissions but spent $100,000 running your practice, you did not really earn $350,000.
We want to know what is left after legitimate business expenses.
That could include things such as:
- Brokerage fees
- Advertising and lead generation
- Photography and staging-related business costs
- Assistants and administrative support
- Vehicle expenses
- Software and technology
- Professional fees
- Office expenses
- Other deductible operating costs
Suppose your commissions are $350,000 and your business expenses are $75,000.
Your approximate net business income is:
$350,000 − $75,000 = $275,000
Now we have a number we can actually work with.
Next, figure out what your life costs
This is where the conversation gets interesting.
How much money actually needs to reach your personal bank account every year?
Not what you think you spend.
What you actually spend.
Look at:
- Mortgage or rent
- Property taxes
- Car payments
- Food
- Vacations
- Children's expenses
- Tuition
- Personal debt payments
- Insurance
- Entertainment
- RRSP and TFSA contributions
- Personal investing
- Everything else required to fund your lifestyle
Suppose your household requires approximately $140,000 of after-tax cash each year.
Your real estate practice is generating $275,000 before personal compensation.
There is now potentially a meaningful gap between what the business earns and what you need personally.
That gap is where the PREC conversation begins.
What could you leave inside the corporation?
Here is the basic idea:
Net Real Estate Income
− Amount You Need Personally
= Potential Retention Capacity
It is not a precise tax calculation. Your personal cash requirement is after-tax while corporate income and compensation involve additional tax calculations.
But conceptually, this is one of the most useful ways to start thinking about incorporation.
The greater your ability to retain money inside the corporation, the more important it becomes to model the PREC option properly.
Consider three realtors.
Realtor 1
Net income: $130,000
Personal cash requirement: $120,000
Potential retention capacity: Limited
A PREC may not provide enough benefit to justify the additional accounting, legal and administrative costs yet.
Realtor 2
Net income: $210,000
Personal cash requirement: $135,000
Potential retention capacity: Meaningful
Now we would want to run the numbers.
Realtor 3
Net income: $350,000
Personal cash requirement: $160,000
Potential retention capacity: Substantial
This is a situation where we would strongly want to model the PREC option.
The point is not that $210,000 or $350,000 is some magical threshold.
The point is that income has started separating from lifestyle spending.
And that can create planning opportunities.
Why leaving money inside a PREC can matter
When you operate personally, your net business income is generally reported on your personal tax return in the year you earn it.
You earn the money.
You report the income.
You pay personal tax on it.
A corporation changes the timing of that conversation.
If the PREC earns qualifying active business income and qualifies for the small business deduction, corporate taxation on that income can initially be significantly lower than the personal tax rate applicable to a high-income Ontario taxpayer.
The important word is:
Initially.
This does not mean the rest of the tax disappears.
When money is eventually paid from the corporation to you personally, additional personal tax can arise.
So the real advantage is often not permanent tax savings.
It is tax deferral.
And tax deferral can be extremely valuable when it is used properly.
Think about what happens over 10 years
Suppose you can consistently leave a meaningful amount of money inside your corporation every year.
Not for three months.
Not until the next vacation.
For years.
That money may potentially be invested, used to create a financial reserve, fund future business opportunities, or become part of a longer-term retirement strategy.
Now extend that over a 10-, 15- or 20-year real estate career.
The question becomes bigger than:
“How much tax will I save this year?”
It becomes:
“How much capital can I build by controlling when I withdraw money personally?”
That is a much more important question.
But can you actually leave the money alone?
This is one of the most important questions we ask.
Suppose you retain $100,000 inside your PREC this year.
Sounds great.
But then six months later you need $80,000 personally for a home renovation, a cottage down payment or lifestyle spending.
You have not necessarily created the long-term deferral opportunity you thought you had.
Contrast that with someone who says:
“I don't need this money. I could leave it invested for the next 10 years.”
That is a very different conversation.
The amount you can retain matters.
How long you can retain it matters too.
A PREC can also help smooth an unpredictable income
Real estate income does not always arrive neatly.
One year you might earn $350,000.
The next year, the market slows and you earn $180,000.
Then activity picks up again.
Your family's expenses, however, may be relatively stable.
Your mortgage company does not particularly care that listings were slow this quarter.
This is another reason a corporation can be useful.
During stronger years, you may be able to retain more money inside the corporation.
During weaker years, accumulated corporate funds may provide greater flexibility in deciding how much you pay yourself.
Instead of allowing the real estate market to dictate your personal income every year, you can potentially create more separation between:
the economics of your practice
and
the economics of your household.
For an established realtor, that flexibility can be extremely valuable.
Salary or dividends?
Once you incorporate, another question appears:
How should I pay myself?
Salary?
Dividends?
A combination of both?
There is no universal answer.
Salary creates earned income for RRSP purposes and generally involves CPP and payroll obligations.
Dividends work differently and do not create RRSP contribution room.
The right compensation strategy depends on your income, age, existing RRSP room, CPP considerations, cash-flow needs, other investments and broader financial plan.
This is another reason we prefer to run the numbers rather than automatically choosing one method.
What about putting my spouse or children into the PREC?
Ontario's PREC rules permit certain family members, including a spouse, children and parents, to hold permitted non-voting shares, while the registered real estate professional must remain the single controlling shareholder and own all of the voting equity shares.
But this does not mean you can simply issue shares to family members and start moving dividends around to reduce the family's tax bill.
Canada's Tax on Split Income, or TOSI, rules can apply to dividends and other amounts received by family members from a related private corporation. Where those rules apply, the intended income-splitting advantage can effectively disappear.
Family share ownership therefore needs to be planned carefully.
A PREC should not be sold to you as a simple income-splitting strategy.
What a PREC does not do
A PREC does not turn you into a brokerage.
You remain the registered salesperson or broker working through your brokerage.
Under Ontario's rules, the PREC must meet specific requirements, there must be an appropriate agreement involving you, the PREC and your brokerage, and your brokerage must be willing to work with the structure.
The registered realtor must be the corporation's single controlling shareholder, president, sole director and sole officer, and must own all of the voting equity shares.
Certain non-voting shares may be held by permitted family members.
RECO must also be provided with the PREC's legal name and address for service before remuneration is paid to the corporation.
These are not simply corporate tax rules. They are part of Ontario's regulatory framework for PRECs.
Does a PREC protect me from liability?
Be careful with this one.
A corporation creates legal separation between you personally and the corporation, but a PREC should not be viewed as a way of eliminating your professional responsibilities as a registered real estate professional.
You still operate under Ontario's real estate regulatory framework and remain responsible for your professional conduct.
For most realtors, the stronger reasons for considering a PREC are tax planning, financial flexibility, retained earnings and long-term wealth planning, not the idea that incorporation makes professional liability disappear.
When might a PREC not make sense?
There are situations where we may recommend waiting.
For example:
You need almost everything you earn personally
If very little money will remain inside the company, the tax-deferral opportunity may be limited.
Your income is still inconsistent or relatively modest
If you are early in your real estate career, adding corporate accounting, bookkeeping and compliance costs may not yet make financial sense.
You expect your income to decline significantly
If your current income is temporary or you plan to leave real estate soon, there may not be enough time to benefit from the structure.
You will constantly withdraw the retained money
A corporation becomes less compelling as a long-term tax-deferral strategy if money goes into the company and immediately comes back out for personal spending.
The numbers simply do not justify the cost
A corporation means another tax return, another set of books, corporate filings, compensation planning and additional professional fees.
The structure should produce enough value to justify maintaining it.
So, at what income should a realtor incorporate?
We deliberately do not give clients a universal number.
But as your net income moves higher, the conversation becomes increasingly important.
If you are earning $100,000 and need almost all of it personally, there may be little urgency.
If you are earning $180,000 and only need $110,000 personally, we should probably run the numbers.
If you are earning $250,000, $300,000 or more and can consistently leave a meaningful portion behind, ignoring the PREC conversation becomes harder to justify.
But remember:
Income alone does not determine whether you should incorporate.
Your retention capacity does.
Five questions to ask before opening a PREC
If you are considering incorporation, ask yourself:
1. What is my actual net real estate income after business expenses?
2. How much after-tax cash does my household really need each year?
3. How much money could I realistically leave inside the corporation?
4. Could I leave that money there for five, ten or even twenty years?
5. What am I trying to accomplish with the corporation?
Lower taxes this year?
Build investments?
Smooth unpredictable income?
Save for retirement?
Create financial reserves?
Build a larger real estate business?
Your answer matters.
Because incorporation should solve a problem or create an opportunity.
Opening a corporation simply because everyone else at the brokerage has one is not a tax strategy.
One more question: What would you do with the money?
This may be the most important question of all.
Imagine your PREC allows you to retain substantially more capital inside your corporate structure over the next decade.
What happens next?
Does the money sit in cash?
Do you invest it?
Do you eventually need it personally?
Are you building retirement assets?
Could another corporate structure eventually become appropriate?
How does your RRSP or TFSA fit into the picture?
What happens when the investments inside the corporation become significant?
There are additional tax considerations as corporations accumulate passive investment income, so simply leaving money in a corporation forever is not automatically the best strategy either.
The PREC should be one part of your overall financial plan.
Not the entire plan.
Maybe the question isn't “Do I need a PREC?”
Maybe the better question is:
“Have I reached the point where my business earns more than my life costs?”
Because when that starts happening consistently, something has changed.
You are no longer simply earning an income.
You are accumulating capital.
And once you begin accumulating capital, decisions about where that capital sits, how it is taxed, how it is invested and when you withdraw it become increasingly important.
That is when incorporation moves from being an administrative question to a financial planning question.
Should you incorporate your real estate practice?
Here is the simplest answer we can give:
If you are consistently earning more than you need to fund your lifestyle, you should probably run the numbers.
That does not mean you automatically need a PREC.
It means you have reached the point where it is worth finding out.
At MiAccounting, we would rather model both scenarios before telling you to incorporate.
What happens if you stay a sole proprietor?
What happens if you establish a PREC?
How much do you need personally?
How much can remain in the corporation?
How should you compensate yourself?
What could the structure look like over the next five or ten years?
Because the goal is not to own a corporation.
The goal is to build the most efficient financial structure around the life and business you are actually trying to build.
Thinking About a PREC?
If your real estate income has grown and you are wondering whether incorporation now makes sense, we can help you work through the numbers before you make the decision.
At MiAccounting, we work with Ontario real estate professionals and owner-managed businesses on incorporation, tax planning, bookkeeping, compensation strategies and longer-term financial planning.
Before you open a PREC, let's determine whether you actually need one.
