Is your PREC actually compliant?

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 earlier years (beyond the normal three years only in limited circumstances, such as a return that contains a misrepresentation attributable to neglect, carelessness or wilful default, or a waiver), 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. Whether any of that follows depends on the facts as well as the wording, which is why a quiet drafting problem is worth finding before somebody else 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 PREC criteria and exemption 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 provision or arrangement restricting the sole director’s powers to manage the corporation, and a business scope that fits what a PREC is allowed to do.
• The tax side. The tax considerations under the Income Tax Act, which sets no requirements for the articles themselves: provisions bearing on control and Canadian-controlled private corporation status, and the share classes that dividends to family members depend on, which the tax on split income rules generally tax at the top marginal rate unless an exclusion applies. Whether the corporation is a personal services business is a question of fact that the wording of the articles does not decide.

The two regimes answer different questions, so they are scored separately and never averaged. Losing the PREC exemption and losing a tax position are different injuries; a strong tax score must never be allowed to hide a RECO problem.

What Red, Yellow, and Green mean

• Green means every requirement the check looks for is satisfied and nothing contradicts either regime. 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 no main condition is missing or contradicted, but recommended protective wording is missing or unclear, or a lesser requirement is contradicted. 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 a main condition is contradicted or its wording is missing, or the document could not be read. 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, the check does not upload the document, and you can have the scorecard emailed to you as a PDF. It rates how the articles are drafted, and it does not certify that your corporation is compliant today. If the check finds work worth doing, the paid PREC Deep Dive, $100 CAD plus HST, sets out every clause in detail, worst first, with what to raise with your lawyer about each one.