If a sale of your PREC is part of your exit plan, it’s important to optimize your structure early on. To enjoy the tax deferral advantages of holding accumulated assets under the corporate umbrella without losing access to the LCGE, proper structuring is essential. This means holding assets that are primarily used to earn active business income in Canada, while limiting the accumulation of passive assets (such as cash and investments). While the rules to qualify for the LCGE are complex, they involve “purifying” the corporation for income tax purposes. With the right planning and structuring, that means you could shelter up to $892,218 (for 2021) of capital gains if you decide to sell your PREC to a child, colleague or arm’s length party. When shares of a qualifying small business corporation are sold, gains realized on their sale can be sheltered from tax under the LCGE. Objective 2: Access to the Lifetime Capital Gains Exemption (LCGE) on sale By keeping your excess earnings and accumulated assets in a holding company, you can retain and invest them as part of your corporate structure while removing them from direct ownership in the PREC. So, what can you do if you want to retain excess earnings within your corporation to take advantage of tax deferral opportunities? One option is to place those assets in a holding company. That means, if you keep those assets in an operating PREC, they can be exposed to litigation or creditor claims. Unlike traditional corporations, PRECs do not confer liability protection for your excess income-such as cash, investments or other passive assets.
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To reap the full rewards, your PREC must be properly structured, and depending on your desired outcomes, the corporate structure of your PREC may shift-making it important to identify your objectives in advance. In addition to letting you defer income taxes, a PREC may allow you to take advantage of a range of other tax benefits.
As a real estate professional, the opportunity to incorporate by setting up your own Personal Real Estate Corporation (PREC) brings many incentives.
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