The modernization of regulations governing Ontario’s real estate industry is welcomed by those in the industry and I am sure it will be embraced by the public.
The first phase of the Trust in Real Estate Services Act, 2020 was implemented on Oct. 1, affecting the work of registered real estate brokerages, brokers and salespersons across the province.
Key measures include allowing real estate professionals to incorporate and be paid through personal real estate corporations (PRECs). In addition, salespersons and brokers can now use terms such as “real estate agent” and “realtor” in advertisements, reflecting the services they provide to consumers.
The Ontario Real Estate Association (OREA) predicts the establishment of PRECs will result in significantly lower tax burdens for its members.
“We are thrilled that our members can now benefit from the same modern business tools as other professions and realtors in other provinces,” states OREA president Sean Morrison in a statement. “PRECs are going to offer realtors substantial tax savings and help them plan their tax payments with the ups and downs of the real estate market.”
Many advantages to PRECs
According to the act, PRECs must be solely owned by a real estate registrant. Morrison praises the PREC model for its flexibility, noting that realtors who establish one may be able to:
- achieve tax deferrals;
- benefit from the lifetime capital gains exemption for shares of a qualified small business corporation;
- income split;
- utilize holding corporations to own and manage their other investment and business activities along with their core real estate trading activities; and
- retain real estate-related income in the PREC to generate investment income or to be reinvested in active business activities.
In a news release, the government focuses on the advantages consumers will enjoy. Those include improving the information they receive about what a real estate professional must do for them. Perhaps more importantly, sellers will have more choice in the sale process as they can now permit their sales agents to disclose details of competing offers.
“Real estate salespersons and brokers are the experts for home buyers and sellers,” states Lisa Thompson, Minister of Government and Consumer Services. “Whether a transaction involves a fixer-upper, a move-in ready dream home or a commercial property, every consumer should know that the person they are dealing with is professional, knowledgeable and accountable.”
Second phase aimed at consumers
The second phase of the act will be implemented later this fall, with measures aimed at improving public confidence in real estate professionals. The three main changes will be to:
- modernize the Code of Ethics for real estate professionals;
- improve disclosure requirements to better protect consumers; and
- give more teeth to the Real Estate Council of Ontario (RECO), which administers and enforces the act. RECO will now have greater powers to levy financial or administrative penalties for failure to comply with a legal requirement, such as not filing a document on time. RECO’s discipline committee will also consider a broader range of issues when deciding whether to revoke or suspend a real estate professional’s or brokerage’s registration or impose conditions on a registration.
I’m happy to see the degree of consultation went into this update. From January until March of 2019, the ministry heard from almost 7,000 consumers and real estate professionals about what changes were needed. There were 144 submissions in response to the consultation paper, with 59 per cent from the real estate sector.
A true win-win
This act is truly great news for both the industry and consumers. OREA estimates the establishment of PRECs will OREA will create 300 jobs in the province and save Ontario realtors $14 million annually in deferred taxes, “money that agents can use to reinvest in their business to hire more employees, offer better services to clients and grow their operation.”
I also share the caution expressed by Morrison, who notes that while this “change is historic, there are advantages and disadvantages to the creation and use of a PREC based on each realtor’s personal circumstances.” That is why everyone should get independent accounting and tax advice before deciding whether to incorporate. According to OREA, there are more than 86,000 registered salespersons, brokers and brokerages in Ontario. These updates to regulations governing this important sector of our economy are badly needed. The current legislation governing the industry, the Real Estate and Business Brokers Act, 2002, was passed at a time when most real estate deals were finalized using fax machines.
In the words of Michael Beard, CEO of RECO: “The updated legislation will provide enhanced protection for consumers and provide additional clarity for registrants around their role and responsibilities to both the buyer and seller. These changes are a reflection of the rapidly changing and modern marketplace and will help to ensure that consumers are protected when they make the biggest purchase of their life.”