The problem does not announce itself
A PREC with defective articles works fine on the surface. The corporation banks its commissions, the accountant files the T2, the tax savings arrive every year. Nothing in day-to-day life checks the articles against Ontario Regulation 536/20, and the registry did not check them when the certificate was issued. The structure is only ever read closely when something forces the question: a CRA audit, a RECO inquiry, a financing, a reorganization, or a sale. By then the returns relying on the structure have been filed for years.
For a Canadian-controlled private corporation, the CRA’s normal reassessment window is three years from the original notice of assessment, and it can reach further back in some circumstances. Where the CRA concludes the corporation was not entitled to the treatment claimed, the exposure can include reassessment of closed years, loss of the small business deduction, personal services business treatment, tax on split income at top rates on family dividends, plus interest and the professional fees to defend it all. That is what a quiet drafting problem costs when somebody finally looks.
What a real check reads
A compliance check worth the name reads the actual wording of the articles, clause by clause, against both regimes separately:
- The RECO side. The registration conditions in O. Reg. 536/20: the single controlling shareholder holding all equity, the sole director and sole officer requirements, who may hold non-equity shares, the absence of any fetter on the controlling shareholder’s powers, and a business scope that fits what a PREC is allowed to do.
- The CRA side. The tax conditions: provisions bearing on control and Canadian-controlled private corporation status, share classes that dividends to family members depend on, and wording that helps or hurts on personal services business risk.
The two regimes answer different questions, so they are scored separately and never averaged. Losing RECO registration and losing a tax position are different injuries; a strong tax score must never be allowed to hide a registration problem.
What Red, Yellow, and Green mean
- Green means the wording the check looked for was found and nothing found contradicts a condition. It is a statement about the document’s drafting, not a certificate of compliance, because several conditions are questions of fact no document scan can answer.
- Yellow means requirements were not found in the text. Absence is not proof of a violation, but every absent protection is something a lawyer should look at deliberately rather than by accident.
- Red means the severity of what was found or missing is serious for that regime, and in the worst case the wording actively contradicts a condition. A red result is the one worth taking to your lawyer this month, not this year.
Check it before someone else does
The free PREC Articles Health Check reads your articles against all of the conditions above in about a minute. It runs entirely in your browser, so the document never leaves your machine, and you can have the scorecard emailed to you as a PDF. It rates how the articles are drafted. It is not legal or tax advice, and it does not certify that your corporation is compliant today: have a qualified professional review before you rely on or file anything. If the check finds work worth doing, the paid PREC Deep Dive, $1,000 CAD plus HST, sets out every clause in detail, worst first, with what to raise with your lawyer about each one.