Calling all Brokers and Real Estate Agents: Come and Incorporate! (updated November 1, 2020)
The Ontario government has finally released the new regulations to the Real Estate and Business Brokers Act, 2002 (REBBA) to supplement the Trust in Real Estate Services Act, 2020, which newly permits real estate agents to incorporate. The regulations set out the obligations, rights, requirements and restrictions of personal real estate corporations (“PRECs”).
The Real Estate Council of Ontario has also released a checklist for real estate professionals to ensure that all PRECs meet the criteria set out in the legislation.
*Note: in this article, the terms “Real Estate Council of Ontario (RECO) registrant” and “controlling shareholder” are used interchangeably
Should I incorporate?
In deciding whether or not to incorporate, see our blog on the advantages and disadvantages of incorporation, consult your lawyer, accountant and insurance provider and speak with your broker of record to insure that your brokerage agrees to your use of and is willing to enter into an agreement with your PREC.
The new regulations require that there be a written agreement between the PREC, the controlling shareholder of the corporation (the RECO registrant/salesperson) and the brokerage regarding the use of the PREC and remuneration. Under this agreement, the PREC agrees:
- not to hinder or obstruct the brokerage or its broker of record in the performance of their duties under the Act and regulations;
- not to hinder or obstruct the controlling shareholder (RECO registrant) in the performance of the shareholder’s duties under the Act and regulations;
- to provide whatever assistance may be reasonably necessary to enable the brokerage and broker of record to comply with their duties under the Act and regulations and to enable the brokerage and broker of record to ensure that the controlling shareholder (RECO registrant) is complying with the shareholder’s duties under the Act and regulations; and
- to provide whatever assistance may be reasonably necessary to enable the brokerage to determine whether certain conditions required of the PREC and controlling shareholder (as listed in the new regulations) are met.
A real estate professional may be able to use an existing corporation as a PREC, if it meets the criteria in the legislation. Some types of registered businesses may be prohibited from being used as a PREC.
Do I need to register my PREC with RECO? Are there licensing or registration fees?
A PREC that meets all legal requirements is not required to register with RECO and there are no licensing fees associated with PRECs, but you must provide written notice of your name, your PREC’s name and the address of your PREC to RECO prior to receiving any remuneration. The RECO registrant (controlling shareholder of the PREC) must notify RECO in writing of any change in circumstances that would affect the PREC’s eligibility for exemption from registration or any change to the information already provided to RECO about the PREC within 5 days after the change takes place.
Naming your PREC
Your PREC must be incorporated or continued provincially, in Ontario, not federally. Be careful to avoid the use of words in the name of your PREC that imply that your PREC is in the business of trading in real estate. As of now, there are no other restrictions in the new legislation regarding names for PRECs; however, the Ontario Business Corporations Act, which governs all corporations in Ontario, requires a professional corporation to have the words “professional corporation” in English or in French in their name.
Ownership and Remuneration
One RECO registrant (a salesperson or broker), who is employed by a brokerage to trade in real estate, must directly or indirectly, own all of the equity shares of the corporation (shares that entitle the shareholder to share in profits of the company) and must hold all of the voting shares of the corporation. Due to a lack of clarity on this topic in the legislation, we do not recommend having any holding corporations, whether owned directly or indirectly by the RECO registrant, hold any shares in the PREC at this point in time.
Family members of the RECO registrant (children, spouse or parents – which are defined fairly broadly in the new legislation) or a trustee for a minor child of the RECO registrant, may hold non-equity, non-voting shares of the corporation (shares that do not permit the shareholder to vote on business decisions or participate in the sharing of profits of the corporation). The RECO registrant may also own non-equity shares in the PREC.
The RECO registrant must be the sole director and sole officer (the president) of the corporation and may not restrict or transfer any of his/her powers to manage or supervise the management of the company to another person (either through an agreement or otherwise).
Before any remuneration is paid to the PREC, the brokerage must ensure that the PREC has met the conditions for exemption from registration under REBBA. The PREC must not pay the RECO registrant an amount for remuneration that is greater than the amount of the remuneration received from the brokerage. The PREC may not receive remuneration for trading in real estate from any person or entity other than the brokerage, and the RECO registrant may not receive remuneration for trading in real estate from any person or entity other than the PREC or the brokerage.
If I set up a brokerage, can I switch over to a PREC?
In order for a brokerage to switch over to a PREC, the brokerage would be required to cease trading, terminate its registration in accordance with the law and meet the criteria for PRECs in the above checklist. A PREC may not carry on business as a brokerage.
Restrictions on business activities
PRECs must only provide the services of the controlling shareholder through the brokerage with which the controlling shareholder is employed and engage in no other business activities or services. PRECs may not trade in real estate, other than in providing the services of its controlling shareholder to the brokerage. Trading in real estate includes “buying, selling, entering into a transaction for, exchanging, having an option in, leasing, renting, offering or listing real estate for the purposes of buying, selling or entering into a transaction related to real estate as well as any act, advertisement, conduct or negotiation to further the buying of, selling of or entering into a transaction related to real estate.” Trading in real estate also includes, on behalf of the brokerage, holding money or other property of a client, customer or other person in connection with a trade in real estate.
PRECs can be used for passive investments (i.e. REITs).
Can I advertise using the name of my PREC?
The RECO registrant (the individual salesperson or broker) may advertise, as they have, using their own name (and must include the name of their brokerage in their ads), but may not advertise using the name of their PREC.
If you have questions related to compliance with the new legislation and regulations and for assistance with setting up a personal real estate corporation or with drafting or reviewing an agreement between a PREC, controlling shareholder and brokerage, please reach out to our business law department.