A Personal Real Estate Corporation is a bargain with the province. Ontario lets a licensed registrant be paid through a corporation, with everything that opens up for tax planning, and in exchange the Trust in Real Estate Services Act, 2002 and Ontario Regulation 536/20 dictate the corporation's shape in unusual detail. Miss the shape and the exemption stops applying, and the registrant cannot be paid through the corporation, usually discovered by the least sympathetic reader available.
The regulation sets six criteria a corporation must meet to be a PREC (s. 2) and eleven conditions it must meet to be exempt from registration (s. 3). Here are the six conditions that shape the corporation most, one by one.
One controlling shareholder holds all the equity
Every equity share of the corporation must be owned, legally and beneficially, directly or indirectly, by the registrant the corporation exists to serve. Under the Act an equity share is a share that carries a vote, including a vote that arises when a stated event has happened and is continuing (TRESA s. 1(1)), so this means every voting share. A partner or a spouse holding voting shares is ruled out, and share provisions drafted for an ordinary corporation frequently permit it without anyone noticing. Because the regulation says "directly or indirectly", a holding company wholly owned by the registrant is permitted on the words of the regulation. RECO's checklist describes the controlling shareholder as owning all the equity shares and does not address holding companies, so the conservative reading is that every voting share at every level above the PREC should trace back to the registrant alone: if a family member owns any voting share anywhere in that chain, the PREC's equity is not owned solely by the registrant.
One director, and it is that shareholder
The corporation must have a single director, who must be the controlling shareholder. Articles that allow a board of one to ten directors, the default in many templates, leave room for a structure the regulation does not accept.
One officer, the president, and it is the same person
The controlling shareholder must be the president and the corporation's only officer. A secretary or treasurer position filled by anyone else works against the condition.
Non-equity shares only for permitted holders
The regulation allows non-equity shares, which is where a lot of the family planning happens, but each one must be owned, directly or indirectly, by the controlling shareholder or their spouse, child or parent, or held by one or more individuals as trustees for the controlling shareholder's minor children. A preference share class open to any holder, which is how ordinary templates draft them, misses the restriction. Dividends paid to family members on those shares are generally caught by the tax on split income (TOSI) rules and taxed at the top marginal rate unless an exclusion applies, so the tax side needs its own advice.
Nothing may restrict the sole director's powers
There must be no written provision, by agreement or otherwise, and no arrangement, that restricts or transfers the sole director's powers to manage or supervise the management of the corporation's business and affairs. Unanimous shareholder agreements and provisions that make ordinary decisions contingent on another person's approval are the classic ways this condition gets broken on paper.
The business is the registrant's services
To keep the exemption from registration, the corporation must not carry on the business of trading in real estate other than providing the services of its controlling shareholder to the brokerage, and its trading remuneration comes only from the brokerage. The regulation does not expressly prohibit a PREC from holding investments or a rental property. Buying and selling property as a business could be trading in real estate, though, and holding investments inside the corporation has tax consequences: passive investment income can reduce or eliminate the federal small business deduction (Ontario does not follow that reduction), and rental or investment income does not qualify for it. Many registrants keep those activities in a second corporation for that reason; it is a decision for your lawyer and CPA.
Where this reaches into the articles
Several of these conditions are questions of fact: who actually holds the shares, whether a brokerage agreement exists. But the share classes, the restrictions, the director provisions, and the business scope live in the articles of incorporation, which means a corporation can be offside from the day the certificate was issued, quietly, with every tax filing since relying on a structure that does not qualify. The registry does not check PREC conditions when it issues a certificate. The brokerage must confirm in writing that the exemption conditions in s. 3 are met before it pays the PREC (s. 4), but the regulation does not require anyone to read the articles clause by clause against it.
Exactly how each condition should be worded is a drafting question for your corporate lawyer. Whether the document you hold today works for the conditions or against them is something you can find out in about a minute: the free PREC Articles Health Check reads your articles against the PREC conditions in O. Reg. 536/20 and the tax considerations under the Income Tax Act, entirely in your browser, and the requirements guide walks through the conditions in more depth.
Capital Toolkit is an automated service. It provides general information, not legal, tax or accounting advice, and it does not replace your own lawyer or accountant. Have a qualified professional review any document before you rely on it, sign it or file it.
Written by Capital Toolkit