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Personal Real Estate Corporations (PREC) and higher standards for Ontario Realtors

One of the most significant pieces of law affecting Realtors in Ontario received Royal Assent in March: the Trust in Real Estate Services Act, 2020 (TRESA), repealing and replacing the Real Estate Business and Brokers Act, 2002 (REBBA). This new legislation permits Realtors to incorporate and receive remuneration through a Personal Real Estate Corporation (PREC). But with this new power, comes even more responsibility. Through changes to Realtor registration, the Discipline Committee and the appeals process, TRESA will hold Realtors to a far higher standard than they were under REBBA.

PRECs have received the most attention of the changes introduced under TRESA, and rightly so. PRECs afford Realtors almost all the legal benefits of a typical private corporation, allowing them an efficient tax-planning vehicle.

Once created, a Realtor’s business revenue and earnings, including commissions and other related remuneration, can now be directed through the PREC. Legally, the PREC owns the real estate business and the Realtor works for the PREC. This allows Realtors to benefit from tax deferral. They can invest their income within the PREC before being subject to income tax. It also allows Realtors to defer personal income taxes by giving them the power to choose when they pay themselves.

Like any other corporation, the PREC requires shareholders. While not entirely clear, the regulation suggests that there can be only one Realtor, registered with the Real Estate Council of Ontario as the controlling shareholder, who holds all the voting shares in the PREC. This seems to leave room for other registrants and related persons (such as family members) to hold non-voting shares. This can be beneficial in assisting Realtors to further reduce their tax burden provided that the related person is actively involved in the business.  And by using dividends, Realtors can reduce their entire family’s tax burden.

Keep in mind that as the PREC owns the business and any investments, property or insurance policies a Realtor may hold through it, the PREC is also required to pay its own tax. This can be beneficial, allowing Realtors to benefit from the lower small business tax rate or general corporate tax rate.

There are instances, however, where a PREC may not always be beneficial. The cost of incorporation and the additional compliance can outweigh the tax benefits. Be sure to speak to a tax specialist before diving into the process.

Registration:

While PRECs come with great benefits, TRESA has introduced changes to the registration process, holding new and renewing registrants to higher standards. Under REBBA, an applicant was all but guaranteed a registration subject to an “unless conditions apply” clause. Under TRESA, conditions do, in fact, apply.

Before approving an application for registration, the registrar may now consider an applicant’s past financial position, their past conduct and any contraventions of the Code of Ethics as grounds to refuse an application. And even if these conditions are met, the registrar must still be satisfied that granting the registration or renewal is not contrary to the public interest.

This means that Realtors will need to hold themselves to a higher standard in both their professional and personal conduct. Any slip-ups may raise an issue at renewal time, delaying a Realtor’s ability to get back to business.

The Discipline Committee and appeals:

Perhaps the most significant but least considered change introduced with TRESA is the expanded scope of the Discipline Committee and the changes to the appeals process.

The Discipline Committee now has the power to determine whether a registrant has contravened, not just the Code of Ethics, but any provision of TRESA and any other accompanying provisions of the regulations under TRESA. This is a significant change. Under REBBA, the Discipline Committee only had the power to determine whether a registrant had contravened the Code of Ethics.

With this expanded scope comes expanded disciplinary powers. The Discipline Committee can now add conditions to a registration, suspend a registration or revoke a registration altogether. Further, the registrar, or any other person appointed as an assessor, can levy administrative penalties if it’s determined that a provision, regulation or a condition of the registration has been violated.  These penalties can be severe, extending all the way up to $25,000.

If a registrant disagrees, they can no longer appeal the decision to the Appeals Committee. Instead, appeals are handled by the License Appeal Tribunal. This will likely create additional safeguards for the procedural rights of the Realtors (referred to as the appellant). But it may also make it more difficult for a successful appeal by introducing more formality into the process and transforming it into a more quasi-judicial one.

These changes mean that Realtors must carefully consider their obligations under the entirety of TRESA, not just under the Code of Ethics. Failure to abide by their obligations may have significant impact on their ability to trade real estate.

Ultimately, TRESA finally extends the ability to conduct a realty business within a professional corporation, an ability long extended to other professionals. With this new power, however, comes greater responsibility. Realtors will now be subject to more stringent registration requirements, expanded oversight by the Discipline Committee, and a more formalised appeals process.


Emraan Dharsi is a third-year law student at Osgoode Hall Law School. A developing advocate, he hopes to practice commercial litigation upon his call to the bar in 2021.

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